UK Pensions Didn't Understand What They Were Buying

I have no brief for erstwhile UK Prime Minister Liz Truss or her government. But given the government’s collapse it is worth asking whether the apparent pension crisis that led to all this sturm und drang was actually caused by those proposed tax cuts. As far as I can tell, the answer is no. This was simply the denouement of a drama that had been unfolding for months and the script written by governments, pension fund managers, companies and regulators of all political hues over many years. For all the headlines to the contrary, it is worth pointing out that the fallout in the financial markets was a liquidity crisis and not a solvency crisis. Although the former can quickly morph into the latter and the Bank of England was right to step in, recent problems for pensions and markets came about ironically because their health had improved so dramatically.

There have been two underlying problems for defined-benefit corporate pension funds. The first is that the companies want nothing to do with them, as they increase the volatility of profits and were underfunded for many years, often requiring an injection of money. The second is that successive governments have used pensions as a piggy bank. In between scrapping tax relief on dividends in 1997 and announcing a change in 2020 to the inflation calculation for inflation-linked bonds to a method that suppressed reported inflation numbers, the government was very happy to stuff savers, pension funds included, with quantitative easing. The result was that lower long-term interest rates massively increased the current value of pension fund liabilities.