Could Bigger-Than-GDP Pension Liabilities Sink The Economy?
The British GDP stands at £1.8 trillion. It is a towering amount. More staggering, however, are the liabilities accumulated by British pension funds: they amount to £2.1 trillion in total, a 23.5% increase from last year. Their liabilities alone significantly outstrip the British GDP which is a worrying prospect. This prospect, however, turns to terrifying if you care to adjoin to that the burden of state pensions, adding several more trillions to the ballooning bill.
According to the statement released by Hyman Robertson which sounded the alarm, this situation is the result of two factors. The first is a misguided financial strategy whereby funds privileged capital growth over income-generating assets. The second factor is the ultra-low long term interest rates, stimulated by the likes of the EU quantitative easing programme, which has pushed up liabilities much faster than the economy has grown. Now the funds are lacking the sufficient liquidities to meet their expectations and are at risk of having to resort to fire sales (at a loss) if money runs dry. The implications of this cash flow imbalance are grave and the threat looms over the heads of 11 million people on Defined Benefit pension plans from private providers.
The question therefore is: what if the first domino falls? What if we have that fire sale, and the inability of a fund to pay the promised amount to pensioners? The consequences would be easily classifiable as catastrophic and could result in the partial or complete write-off of pensions for many thousands of Britons. In this hypothetical case, the British government would be faced with a dilemma that sounds all too familiar to our ears today: bailout or inaction? We have now learned from not-so-distant experience that both options are far from optimal. Yet if nothing is done to address this impending meltdown, we might witness the tragic re-enactment of the credit crunch that shook the financial world to its foundations and from which the financial system and governments slowly and painstakingly recover from.
However, Calum Cooper from Hyman Robertson, who is involved in the release of the statement offered reason to avoid panic :"Fortunately there is a clear opportunity right now for schemes, especially small and medium sized ones, to complete bulk annuity deals at highly competitive prices. This is because the life assurance sector has been hit hard by George Osborne's 'freedom and choice' in pensions, which has caused sales of individual annuities to collapse. Insurers are looking to offset this lost income by entering the corporate pensions market. The conditions are good, but pension schemes will need to move quickly to take advantage of this short window of opportunity."
Yet, this overexposure is too much of a risk to bear for the reeling financial system. This risk, compounded with fears of a Greek default, the possibility of the rise of a syriza-like party in Spain and an expected EU referendum in Britain in 2017 add a lot of uncertainty to European markets. If all these factors align, financial upheaval is to be expected.