Britain’s millennials, already suffering for the economic mistakes of the past, now face the prospect of having to pay for the country’s future.
Pension-fund liabilities in the U.K. increased to a record 1 trillion pounds ($1.3 trillion) after the Bank of England’s interest-rate cut this month, hurt by quantitative easing and razor-thin yields. It’s Britain’s version of what Duquesne Family Office LLC Chairman Stanley Druckenmiller calls “Generational Theft” in the U.S.
READ; External shocks accentuate Central Asian weaknesses
Plunging bond yields have caused pension liabilities to balloon and it could get even worse because the BOE will probably reduce interest rates further this year, according to a survey of economists by Bloomberg. Deficits for defined-benefit-pension funds already rose by more than 40 percent in the two months through July, following the vote to leave the European Union and the central bank’s subsequent decision to increase quantitative easing, according to consulting firm Mercer.
Money managers, however, appear to be unwilling to offload their higher-yielding gilts because they’re worried about generating enough returns to pay their members. The BOE last week failed to find enough investors who were prepared to sell their longer-maturity gilts, a slice of the credit market dominated by pensions and insurers.
As many as 1,000 defined-benefit plans are at serious risk of insolvency in the U.K., meaning they may not be able to pay members’ pensions in full, the Pensions Institute and Cass Business School said in a December report. The deficit at the U.K. plans is estimated to have risen about 73 percent to 408 billion pounds in the 12 months through July, according to the Pension Protection Fund, which compensates workers when companies become insolvent and have a shortfall in their defined-benefit plans.
READ; Arab states will struggle to reduce youth unemployment
The protection fund “may need to adopt facets of its American cousin, the Pension Benefit Guaranty Corp., to address growing pension deficits,” Tyce and Bowry wrote in a note on Wednesday. “These include the ability to claim up to 30 percent of a business’s net worth and to proactively engage early with weaker employers directly.” The U.K. and Europe also face a wider pension problem: an aging population will have fewer workers to fund state pensions, which may mean higher taxes for employees. Last year, there were four workers for every person aged 65 or more in the European Union. By 2050, there’ll be just two, according to Eurostat estimates.
