This week’s news that Carclo, a major technical plastics manufacturer in Yorkshire, has warned that its final dividend to shareholders will be reduced or eliminated in order to shore up the company’s defined-benefit pension fund, starts to bring the reality of the crisis in pensions home to a wider audience. The significant decrease in bond-values, the primary investment component of most defined benefit pension funds, since the EU referendum result means that the liabilities have grown significantly, and therefore the shareholders share of the profit must be sacrificed to plug the gap.
Experts now believe that many of the other 6000 firms in the UK with DB schemes will now follow suit, as the deficit in pensions soars to over £1 trillion on the back of collapsing bond yields. This shows how the albatross of pensions that is hung around the neck of profitable firms is going to drag them down unless swift action is taken to ameliorate the problem.
The Yorkshire firm’s shares fell by 12% in the aftermath of their announcement. And this shows the danger of contagion. Because now not only have the shareholders suffered an income drop and a fall in the value of their assets due to the pensions crisis, but any funds invested in the company, including DC investment funds, have also fallen.
So, the decline spreads across the divide to the DC world, whose returns are now lower. Scale this up to cover the totality of the firms involved and it is clear that, even though underlying profitability is fine for many of these firms, there is an overall destruction of wealth across the pension’s sector and spreading out further into the investment community. Even the DB pensioners are not safe, with the increasing likelihood of the pension scheme failing and been taken over by the Pension Protection Fund, with a resulting cut in their expected pay-out.
As long as quantitative easing continues, this situation will not get resolved. Bond prices will continue to fall and interest rates will remain at far too low a level to provide a decent return for any party that is responsible for deriving long-term income for either groups or individuals.
It is clear that the Bank of England will continue on this course for the foreseeable future, with the interests of the job market consistently being put ahead of the interest of investors and savers. A low-rate environment will continue to encourage borrowing for consumption rather than for investment and the long-term growth of the country is sacrificed to the short term needs of the political establishments' need for short term improvements in the economic background.
Meanwhile the problems of the pensioner age group, a cohort that is destined to grow even more rapidly as a percentage of society if the brakes are put on immigration, will continue to weigh heavily on future governments, and by default on future taxpayers. In Yorkshire, famous for its blunt speakers, one firm has decided to speak up and deal with the issue directly. The government needs to have the same courage and take action before this particular rolling stone becomes an avalanche.