I remember the miners’ strike of 1984-85 well although the NUM and the Government had been battling it out, along with other trade unions, in the UK nationalised industries of the 1960/70s over pay and conditions while coal went through fundamental changes in supply, pricing and preference as a main source of fuel. Arthur Scargill, the firebrand NUM president’s name still rolls of the tongue by anyone remembering this strike.
The names of the presidents’ of the public sector workers unions Unison and Unite will be quoted in a similar context to the NUM and Scargill after this decade or however long the reduction of government indebtedness requires to return to sustainable levels. Are you able to name the leaders now? Although so far good with maintaining our AAA rated gilts.
The unfunded public sector pension deficit is more than £1 trillion. Adding that to Government borrowings and other off-balance sheet borrowings such as PFI and the extent of UK indebtedness becomes rather frightening along with other EU countries and not just Greece. The US also has such debt concerns too once its pension and healthcare liabilities are added to its federal, state and municipal government borrowings.
Who in the public sector wouldn’t want a defined benefit final salary pension. Retiring at 60 approximately and able to depend on an annuity providing a decent standard of living for life guaranteed by the Treasury. The majority of public and private pension schemes are managed by City fund managers trying to match assets to liabilities in volatile unpredictable global markets. How are the returns required (often quoted at 7-8% pa) to be achieved where perceived safe assets like UK 10 year gilt yield is 2.33%, the US 10 year treasury is 2.25%. With difficult and by chasing riskier high yielding investments in Asian or emerging markets, alternative or derivative based instruments. If trend or above trend economic growth isn’t happening then diversification in risk occurs to satisfy almost impossible to meet returns for the pension promises made. Inflation and printing money is the other way.
To meet these liabilities the possibility for the fund management and wider financial industry to stoke up problems for a future financial crisis are ever present. Global regulators should be vigilant in markets such as ETFs and leverage trading platforms. Whose numbers and uses have proliferated over recent years. Can the Government this decade enforce a conversion from defined benefit to defined contribution schemes to avoid such financial or inflationary risks? If economic growth or debt curtailment doesn’t occur to a satisfactory level such measures may become ever more necessary prompting a great battle with the Unions. Where the measures in yesterday’s budget a step in that direction?
The FT recently** carried the headline “The Jinxed Generation” and made the point that the younger generation can no longer be expected to be better off than their parents for example with housing affordability or pension provision. People retiring now have accrued the maximum in SERPS and in DB schemes. I speculate there is a line in the demographic sand of about 52 years old below this when retiring at 60 or 65 the system may be severely stressed and by 2029 in a state of collapse if austerity or economic growth measures turn out to be wrong. In short if you’re in your 40s retirement-private or public sector – maybe longer away than presently expected and only then part-time at best.
So what is required is a strong recovery, a strong willed government or a rebellious youth and middle youth to prevent run-away economic and inflationary disaster. Place your investments or bets now.
LDC