ButtonwoodHands off our pensions

A tempting target for impoverished governments

IN THE war on savers a new front has been opened. Savers are already penalised by record low interest rates, as central banks try to bail out debtors. Now governments are feasting their greedy eyes on private-sector pension pots.


As Peter Attard Montalto, an analyst at Nomura, an investment bank, points out, the Hungarian government will gain in three ways from this shift. First, it will no longer have to pay contributions into the private-sector fund; the public pension scheme operates on a pay-as-you-go basis. Second, it gets the direct benefit of employee contributions, helping to reduce the budget deficit. Third, some of the private pension assets are being invested in government bonds; these can be “retired”, reducing the government's debt. The remaining assets will be sold over the next two to three years.


And there are many ways of redirecting the pension cash. In Ireland the National Pension Reserve Fund, set up at a time of budget surplus, is providing €12.5 billion ($16.3 billion) towards the bail-out of the banks. Since that sum represents half the fund's assets, this is clearly not an investment-led decision.

It is easy to understand why governments are tempted. They have enormous deficits to plug and lots of government bonds to sell. And the pension funds are just sitting there, with billions of assets, and very little protection. Try drumming up a street demonstration about pension funds' asset allocation.

Cynics might argue that various accounting and solvency regulations that encourage pension funds to discount their liabilities by the government-bond yield have created a handy incentive for pension funds to invest in government bonds.

In Britain Gordon Brown staged an infamous pensions tax “grab” in 1997, which reduced private pension funds' income by around £5 billion (then $8.4 billion) a year by eliminating the tax credit on dividend payments. But Mr Brown's raid and a recent change in British tax policy on private pensions aimed at high earners indicate the complexities of the subject.

Many governments have given tax privileges to pension funds as a means of encouraging savings and of reducing the potential burden on the state of provision for the elderly. But any such tax shelter is bound to be exploited by the wealthy, which means it can grow into a very large annual subsidy. That makes it a tempting target for deficit-cutting finance ministers. Tax breaks for savings also present a macroeconomic dilemma, at a time of worries about weakness in demand. Governments might conclude, with a nod to St Augustine; “Lord, give me more pensions saving, but not yet.”

Take, for example, a recent analysis by Aviva, an insurance company, which attempted to calculate the difference between the expectations of European workers for a retirement income and the benefits they will actually receive. Aviva assumed that workers would desire a replacement rate (pension income as a proportion of final salary) of 70%; they are on target to achieve a replacement rate of between 35% and 55%, depending on the country. In annual terms, this equates to a shortfall of 19% of GDP.

Even if this figure substantially overstates the problem, a decision by workers to narrow the gap by increasing their savings rate by, say, ten percentage points would have a huge impact on corporate profits, government tax revenues and GDP growth.

So beating up savers can be represented as a kind of Keynesian demand management. After all, Keynes talked about the “euthanasia of the rentier”. Robbing the rentier pays even better.


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