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The Actuary The magazine of the Institute & Faculty of Actuaries
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Chancellor's Autumn Statement 2011: round-up and reaction

The OBR revised GDP growth forecast down from 1.7% to 0.9% for this year, and from 2.5% to 0.7% in 2012, but does not expect a recession.

And £100bn of extra borrowing is said to be needed over the next four years (with borrowing levels forecast at £127bn for this year, £120bn in 2012/13, £100bn in 2012/14, £79bn in 2014/15, £53bn in 2015/16 and £24bn in 2016/17).

The OBR said the slower growth and higher borrowing forecasts were a result of the 'ongoing impact of the financial crisis, the euro area crisis, and commodity shock'.

The figures contrast with Monday's predictions from the Organisation for Economic Co-operation and Development that the UK would slip into a double-dip recession over the coming months, with growth of just 0.5% in 2012.

The Chancellor's Autumn Statement included the following commitments:

• Public sector pay awards will be set at an average of 1% for each of the two years after the current pay freeze comes to an end

• State Pension age will be raised from 66 to 67 between April 2026 and April 2028

• Basic state pension to increase by £5.30 per week from April 2012

• Pensions credit to rise by £5.35 per week, paid for by an increase in the means-tested income threshold for savings credit

• £20bn of private sector investment in infrastructure to be targeted through a memorandum of understanding with two groups of UK pension funds and establishing the Infrastructure Investors Forum with the Association of British Insurers

• Commitment that employers making asset-backed pension contributions do not receive unintended excess tax relief.

• 3.02ppl fuel duty increase due to take effect on 1 January 2012 to be deferred to 1 August 2012; the second increase planned for 1 August 2012 will be cancelled

• Bank levy to increase to 0.088 per cent from 1 January 2012, with the aim to raise at least £2.5bn each year

• The government will not issue CPI-linked gilts in 2012/13, following a consultation by the Debt Management Office, but will keep the issue under review in the medium term.


Round-up and reaction
Here we gather a selection of responses to the proposals from across the industry:


ball-john-tower-watsonJohn Ball, head of UK pensions, Towers Watson:
"The Government has timed the latest increase in the State Pension Age so that it delays the retirement of the 1960s baby boomers. Almost six million of them will now spend a full year less claiming State Pensions. Nonetheless, official estimates of life expectancy have increased so much that this group is still expected to claim their State Pensions for longer than the last Government intended when it told them they would have to wait until 66 before retiring."

"According to official projections, average lifespans from age 67 in 2028 are expected to be 21.4 years for men and 23.9 years for women. That's the same as average life expectancy at 66 in 2020. If the Government wanted to keep this more or less constant going forward and put its faith in the official projections, it might increase the State Pension Age to 68 by about 2036 - 12 years sooner than planned under current legislation."

"This ambition for longer retirements may be another casualty of straitened economic circumstances. Today's news is another reminder that what we get from the State in retirement will depend on what politicians decide is affordable. However, the Government is not trying to reverse the big increases in expected retirement lengths already seen."

"Once the State Pension Age reaches 66 in October 2020, it will be frozen for five-and-a-half years before rising again. This means that people born in 1959 might on average be expected to spend an extra six months or so in receipt of their State Pension compared with people born in 1961. Winning this year-of-birth lottery can be worth thousands of pounds."

 

John Hastings, partner, Hymans Robertson:
"[The call for] investment from British pension funds to build new infrastructure is an important move and could help the UK grow its way out of its current economic problems... If a holistic solution can be found that benefits the State, pension funds and the workforce building these projects, then it should be a success.

"If pension fund infrastructure investment is going to work in practice, then it will require more than just a copycat approach of projects abroad.

"In particular, many UK final salary schemes are closing or closed. These schemes are more likely to need streams of annuity income rather than equity exposure. Any infrastructure deal needs to be structured in this way to maximise its usefulness for schemes. The alternative group of defined contribution pension funds are not yet mature enough so few currently have sufficient investment scale, though this may change in future.

"The level of fees involved is also critical. The agency costs of intermediaries need to be controlled. Many infrastructure products involve a large chain of agency costs orientated to financial engineering rather than operational management, which diminish returns to investors."


cooper-deborah-mercer-2010Dr Deborah Cooper, partner in Mercer's Retirement, Risk and Finance business:

"The consultation into 'Employer Asset-backed Pension Contributions' (ABCs) [is] a constructive step towards bringing this valuable funding tool into the mainstream. The ending of the practice of claiming double tax relief is likely to help ABCs shed their 'dark' image and allow them to become part of the mainstream toolkit available to trustees and employers considering how to finance their schemes. The ABC market is developing and, as with any new financial structure, it's appropriate for HM Treasury to review how they work.

"Asset-backed contributions can be a good funding solution for trustees and employers alike. The pension scheme has its deficit addressed up front and the employer's cash flow requirement is less onerous than under a typical cash-only recovery plan. This is particularly important in the current economic climate. However, we agree that, in terms of tax liability, there needs to be a level playing field between different structures for making contributions."


Nick Sykes, European director of consulting, Mercer Investment Consulting:

"Without seeing the detail around what the expected return and risk for these investments will be it's hard to predict the take-up by UK schemes. How these investments will be made available to pension funds and the return they might yield will decide who invests and how much."


smedley-mike-kpmgMike Smedley, pensions partner, KPMG:
"We welcome the clarification of the treatment of asset-backed funding for pensions. These have grown in popularity in recent years and provide a solution to pension deficits that can meet the needs of companies and pension schemes. The Treasury has endorsed the use of these structures and confirmed that an up-front corporation tax deduction is still available - provided the arrangements are structured in the right way and result in a fair tax treatment over their life. But there will be an immediate halt to some of the aggressive structures on the market that effectively generate a "double-dip" on tax relief.


mody-raj-pwc-1Raj Mody, head of pensions, PwC:
"Infrastructure investment opportunities will be a useful development for pension funds, particularly given the challenges with the gilt and bond markets currently. However, pensions funds and their sponsors need to be cautious. Not all infrastructure is the same and there can be huge variability in terms of risk and returns, including reputational risk. Some infrastructure projects will deliver returns like index-linked bonds whereas others will behave more like equity investments. Pensions funds will have to analyse the choices relative to the diversification they seek in their overall asset portfolio, which will depend critically on the pension liabilities they are trying to cover."

PwC logoAlex Henderson, partner, PwC:
"The Chancellor's plans to restrict the deductions available for asset-backed pension contributions are not unexpected. [Employers] may be surprised at the scope of the measures, which will apply from today. But overall the measures look to restrict relief rather than abolish it. We expect this area to be of continuing interest for many employers facing deficits in their schemes and employers will be pleased to have the additional certainty of specially designed legislation. The Chancellor is looking to raise significant sums from the change but it is not clear that there is that much revenue for him to go for, as most employers will have been looking simply to achieve what he is now proposing to allow."

Ed Wilson, director, PwC:
"The Government has brought forward the increase in the state pension age to age 67 by nearly 10 years so that it will be place by 2026. There is a clear direction of travel that means that many of today's younger employees can expect to be working well into their 70s. Today's announcement will have a significant impact on many people and businesses. The shape of the workforce will change dramatically and this is both a challenge and an opportunity. Companies will need to adapt how they train, reward and recruit staff in order to remain competitive. This is no longer a far off scenario, plans need to be put in place now.

"Equally, people hoping to retire at a particular age are having to revise their plans and are facing a stark choice between working longer, saving more or retiring poorer."

Comment from Aon Hewitt, Saga, Newton, Russell Investments, Sacker & Partners, Age UK and the CBI on page 2...

 

wesbroom-kevin-hewittKevin Wesbroom, principal consultant, Aon Hewitt:
"We welcome the acceleration of the increase in State Pension Age. While we appreciate that it will be unwelcome for individuals and challenging for employers, it is essential our pension system and the individuals in it recognise the inexorable increase in longevity.

"The rise to age 67 will now start eight years earlier, in 2026. However, because of increases in life expectancy, someone retiring at age 67 in 2026 still has the same expected number of years in retirement as someone retiring at age 65 in 2005. Life expectancy for a male aged 65 when state pensions were reformed in 1948 was 12 years. It's now 18 years for a 65 year old. State pension ages therefore still have a long way to rise if the government intends to bring pension payments back into line with historic levels.

"Employers will have to come to terms with employees now in the thirties retiring at 68, and those in their forties retiring at age 67. This shines a light on both the adequacy of occupational provision and how employers make use of staff in their later working life. If people can't afford to retire, then given the abolition of the Default Retirement Age, forcing them to retire is going to become increasingly difficult for employers. They may need to offer incentives - like good company pensions."


aon-hewitt-logo-red-blue-largeColin Robertson, global head of asset allocation, Aon Hewitt:

"It is good to see the Government talking to pension funds about their requirements for investment. There is considerable demand from pension funds for infrastructure investments and this should be especially the case for Local Government schemes which can adopt a longer time horizon. However, pension funds must consider what is best for their scheme. They will need to take account of the illiquid nature of infrastructure and carefully assess the financial terms of the Government's proposed investments. Also, while typical pension fund infrastructure investments are in "secondary infrastructure" which have become cash generating and are similar to gilts, the infrastructure projects put forward are "primary infrastructure", which is more like venture capital."

 

altmann-ros-pmi-conf

Ros Altmann, Saga director-general:
"As life expectancy is rising it is inevitable that the state pension age will increase. Pension ages everywhere are rising. Today's announcement that Britain's state pension age will increase to age 67 starting from 2026 is not far out of line with other nations. Around that time, the US, Netherlands, Germany, Denmark and Spain will all be increasing pension ages to 67 and Ireland's pension age will be 68.

"It also does give people around 15 years' notice which is fair, however it is really quite scandalous that the government refused to use some of the money saved to delay the original rise to age 66 that has just been passed into law."


hensman-peterPeter Hensman, global strategist, Newton:
"Despite the slowdown in the UK economy, the Chancellor argued the correct course was to do whatever was necessary to protect the UK from the global debt storm, not to increase borrowing to support short-term spending.

"While the downgrade to the OBR forecasts mean that government borrowing is expected to be £100bn higher over the next five years than predicted earlier in the year, the credibility of the government plan backed by the monetary intervention of the Bank of England meant, as Osborne will have hoped, the statement raised barely a flutter in the bond and currency markets.

"The attempts to offset this challenging outlook were largely as trailed in advance, with the Chancellor seeming to rattle through all of the projects expected to benefit from the £20bn pension fund backed infrastructure plan - including the Kettering bypass and Bristol link road.

"However, there was little sign of a substantial change to suggest this plan is dramatically different from "plan A" and the intention to keep UK government finances out of the market spotlight."


russellJames Ind, Russell Investments:
"The focus of the Chancellor's speech centered on the government's achievements in keeping long-term debt interest rates low. Sustained low interest rates have been presented as a central pillar of the UK's economic resilience and of our potential to recover. Several times, the Chancellor referred to the rates the government has "secured" for Britain, but that is a dangerous assumption. He is right to highlight a 1 per cent increase in borrowing levels will cost the nation and its households billions of pounds, but for reasons beyond his control, an increase in those rates of 1 per cent in the future is a very serious risk. The current situation cannot be considered normal.

"An exceptionally strong rally in bond markets of over 20 per cent over the last two years has left ten-year yields at 2.2 per cent, less than half the current level of retail price increases. For a government coupon that keeps up with long-term inflation, investors now have to pay the government (in real terms) to lend their capital. The safe haven status assigned to Britain partly comes down to its detachment from the Eurozone, and its ability, as a last resort, to create more currency to avoid default. As France and even Germany begin to be seen as less sheltered from any looming Eurozone catastrophe, the UK, despite its economic challenges, has appeared the least unappealing option at a time when investors are desperate for any low risk assets. It is like being Ryanair's most popular sandwich.

"The Chancellor also announced that we have fallen well behind our fiscal target and may have to issue an additional £160 billion of new gilts to meet this growing structural shortfall. We are now weeks away from achieving our first trillion pound national debt. The full extent of our liability is as much a four times this unfathomable figure. British residents who will be called upon to pay this bill are themselves already in personal debt to the tune of another £1.5 trillion, while our lopsided economy is exporting £40 billion less than it imports. Among the 34 OECD nations only the crumbling Greece, Spain, Portugal and Italy are forecast to grow less next year.

"Britain, especially its exporters and government owned banks, would be severely impacted by a Eurozone collapse (and the improbable "print to avoid default" scenario would inevitably translate into self-defeating inflation). Safe haven is a phrase that should be used carefully with respect to the UK. Ten-year government bond rates at 2.2 per cent are a huge boon to the UK economy, but given current circumstances cannot be considered "secured".

"In times of stress, markets have a cruel tendency to seek out and punish concentrations of risk. The sometimes unrecognised risk that gilts, and other lower yielding bonds tied to their value represent, both for safety seeking investors and for the forecasts underpinning our economic projections may be one of the great concentrations of risk in the world."


lynch-zoe-sackersZoe Lynch, partner. Sacker & Partners LLP:
"[The basic state pension rise] is finally some good news for pensioners but remember that it is just tagged to the September inflation figure so arguably it's just a delay in putting the money back in people's pockets. Still at least pensioner poverty isn't getting any worse."

"George Osborne couldn't resist the very public opportunity to have a go at the public sector over the planned strike over pensions tomorrow. He said nothing about the savings on pensions which I suspect means that means a deal is far from agreed. But, to add to their woes, the public sector seems to be paying for the planned strike by being subject to a continued pay freeze."

"Despite the rumour-mongers - there will be no changes to pension tax relief. Thank goodness... with the retention of tax relief, we have a fighting chance of getting people to save into pension schemes."


age uk logo cmyk coatedMichelle Mitchell, charity director, Age UK:
"The decision to speed up the timetable to increase the State Pension Age to 67 will come as a bitter blow to many people fast approaching retirement especially those in ill-health, caring for relatives and those out of work.

"Age UK recognises that as life expectancy increases it is reasonable to consider increases to State Pension age and longer working lives, however this decision has been based on no published detailed analysis. Average life expectancy must not be the only factor that is considered as at the moment the huge disparities in healthy life expectancy across the country means that the poorest socio-economic groups will be required to sacrifice proportionately more of their retirement.

"Age UK is calling for an Independent Pensions Advisory Commission to be set up to ensure pensions decisions are based on all the relevant factors including inequalities in life expectancy, employment opportunities, trends in private provision and prospects for older workers. This week the Government has announced an increase in State Pension age and a delay in auto-enrolment for some people rather than looking at retirement provision in the whole. Any changes in State Pension age should be made in the context of a strategy to improve health inequalities, a timetable for the reduction and abolition of pensioner poverty and a strategy for achieving this, a firm commitment to private pension reform and improvement to state pensions."


CBI director general John CridlandJohn Cridland, director-general, CBI:

"Investing in our infrastructure will act as a stimulus to growth. The projects announced will not just boost immediate activity and jobs, but a longer-term infrastructure plan will support our construction sector in the years to come.

"We've called for new forms of investment to attract up to £200 billion into the UK's infrastructure in the next five years. Making it easier for pension funds to invest in UK infrastructure is a great idea, but we need to get the detail right."

"In the light of weak growth, further restraint on pay awards in the public sector is a tough but necessary step. In the longer-term, it is essential that pay reflects local labour markets. The Chancellor is right to ask the pay review bodies to explore how this could be done.

"Banks must play their part in restoring the public finances, but like any other business they need certainty to help them plan with confidence."