Pensions World

Anthony Hilton, Evening Standard, gives the story behind government statistics and the implications of the need to reduce personal debt

Government statistics which seek to measure economic activity are almost always inaccurate at first cut because of the complexity of what they seek to measure. Thus we grow used to the growth figures for one quarter being adjusted up or down in the next. But they are also subject, perhaps once a decade, to long term revision. The result is that it is only when we come to look back, often from considerable distance, that we can see what was really happening.

Sometimes what we see should give cause for cheer; other times it should serve as a warning. For example, in the six years after the recession of 1992–3 – a disaster for government finances very similar to what we are going through today – the economy grew at an average rate of 3.6%. But no one believed so at the time, and former chancellor Lord (Norman) Lamont’s political career never recovered from his claims to have sighted “green shoots”.

More unnerving, however, is other long term trend information which suggests that in the ten years from 1997 to 2007, the longest sustained period of growth since the war, there was little to no increase in the income of the bulk of the population in real terms. People felt more prosperous, and consumption certainly increased throughout the period, but this was largely financed by debt. Debt per head more or less doubled in the decade – people felt much better off because they could borrow more.

Unintended consequences

The fact that the opposite is now happening could have profound consequences. The recession has been less severe than in previous economic slowdowns when measured by the increase in the level of unemployment, but the need to reduce debt means most households are feeling the squeeze, so there is still a major drop off in spending.

We have never had this kind of recession before where the debt is a problem for the personal sector. No one is quite sure how people will behave. This is a big concern for public sector pension schemes which are having to assess the likely impact of the Hutton proposals for public sector pension reform, and the parallel demand from the chancellor George Osborne that member contributions increase by 3% in very short order. One of the leading public sector unions said last month that there had been an alarming surge in the number of people leaving one of the Manchester based schemes since the announcement of higher contributions were in the pipeline. The figures supported the analysis though the numbers were small.

A drop off in member numbers does not have unintended consequences for the taxpayer as scheme sponsor when the pension scheme is unfunded. But this is not the case for most schemes at local authority level, the majority of which operate as contributory conventional defined benefit plans. And for these it is a matter of serious concern that a sharp increase in the required level of employee contributions at a time like now when incomes are under pressure for other reasons could indeed lead to a significant increase in the numbers pulling out.

The opposite effect

The absurd thing is that this could undo the effect of reform. If significant numbers withdraw, then the cash flow of the schemes will diminish and their maturity profile will come much closer. This will mean they will have to change their investment strategy, reducing the proportion of return seeking assets and investing more heavily in bonds. This will reduce the projection of growth in assets for the fund and increase the liability side so the projected deficits will rise. And this will require additional contributions from the scheme sponsor – the taxpayer.

Thus the government’s plan to increase the contribution from employees to reduce the burden on the taxpayer could have quite the opposite effect. How often have we seen that?
Anthony Hilton is financial editor, Evening Standard; anthony.hilton@standard.co.uk