Pensions: the time bomb ticking at the heart of society

If there’s one thing that keeps most people on the straight and narrow, it’s the thought of retiring to a comfortable old age. You won’t go out throwing bombs, joining revolutionary parties or selling cranky newspapers outside Tube stations if it imperils your chances of spending quality time with the grandkids or blocking airport lounges with your unfeasibly bulky luggage. As the Capitalist Class, bless ’em, has always known.

Until relatively recently, the system had worked well. Pension funds took a slice of your money, invested it , and at the end gave you a lump sum which was then used to buy an annuity, and off you went to buy a car/boat/Benidorm villa, “au pair” or whatever. But now there are real fears that the whole scheme has seized up, leaving millions seriously out of pocket. Samantha Downs [1] has an excellent article here, but we’ll try to summarise a little below.

After the crash of 2007-2008 the world was only saved from disaster by quantitative easing, that strange but necessary global lowering of interest rates which kept the world running on life support. But pension funds carried on buying gilts, understandably, as they looked so safe. However, post Covid, interest rates are rising, and so are the values of gilts. (The price of any bond, such as a gilt, will always fall as the yield rises. And these yields have to rise to compete with interest rates offered elsewhere.)

Suddenly, the value of the stuff you need to buy an annuity has fallen away, with little hope of getting back up any time soon. A lot of people will find their retirement to be penurious. Which is always worse when you weren’t expecting it. In countries dependent on the grey pound, that will leave a big gap in discretionary spending. More worryingly for us a compact of understanding between the system and its loyal subjects has been broken. Younger people will start to entertain real doubts about their own futures. And who can blame them if they start to look for alternatives?

we thank Mr Peter Seymour for the idea behind this story


#pensions #gilts #bonds #annuities

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