In the midst of all the headlines about banks going bust and billion dollar bailouts, one aspect of the chaos currently ripping through the financial markets has gone relatively unmentioned – the looming crisis in pension funds.
The Wall Street Journal carried an article last week detailing the problems appearing in a worrying number of British company pension schemes.
The pension funds at British Airways, BAE Systems, Taylor Wimpey, Compass Group and TUI Travel were all “in deficit” last year – they did not have enough assets to cover all the pensions they are expected to pay out.
In the case of British Airways, BAE and Taylor Wimpey, the deficit was larger than 10 percent of the company’s “market capitalisation” – the theoretical market value of the whole company.
That was last year, before the financial crisis hit in earnest.
Many people think of pension funds as a saving scheme for old age. However pension funds use the money invested in them to trade on the world markets – typically buying up stocks and corporate bonds. Now the prices of both are dropping rapidly, making the funding deficits even wider.
And the crisis does not just affect private sector pensions.
The Strathclyde Pension Fund, which pays out the pensions for local government workers in much of the west of Scotland, had a £1.6 billion surplus at the end of June 2007. That had turned into a £1.4 billion deficit at the end of June this year.
Some commentators have blamed these yawning deficits on recent technical changes in accounting rules for company pensions. Others pin the blame on plummeting share prices.
But the real reason for the deficits is that the pension schemes were underfunded in the first place.
When stock prices were soaring in recent years, many companies took “pension holidays” – diverting money away from pension funds and into other areas, such as dividends for shareholders.
The rationale for these “holidays” – apart from sheer greed – was that the pension funds were already rich enough to pay their expected liabilities and didn’t need to be topped up further.
Now it has become clear that these alleged riches were built on a bubble fuelled by easy credit.
One other factor has added to the misery. Like any other aspect of capitalism, the pensions industry is highly competitive.
Funds will do almost anything to squeeze a few extra percentage points of return out of their investments – and thus pull ahead of their rivals.
The latest craze has been pension funds getting involved in the arcane world of “credit default swaps”. These, in essence, allow financial institutions to lay bets on whether a particular company will go bust or not.
In recent years many pensions funds have boosted their returns by writing credit default swaps.
This meant a steady trickle of insurance premiums flowing in their direction – as long as the firms they were betting on did not go under.
Now the credit crunch has changed all that. Companies that had seemed creditworthy are going into default, and institutions that had been benefiting from a stream of payments are now being hit with an unexpected whopping bill.
If, as many economic commentators predict, the credit crunch worsens in the coming months, more firms will default on their loans and the whole credit default swaps market – worth an estimated $2 trillion – could implode, taking down pensions funds with them.
All this has direct political consequences. The current chaos has sparked an orgy of recriminations among the ruling class, as bankers, politicians and regulators all attempt to blame each other for the crisis.
But whatever their differences, there’s one thing all of them will agree on – the need to make working people pay for the crisis in capitalism.
Pensions are, in essence, deferred wages. By rights they belong to workers, but in practice they are held in the clutches of financial institutions controlled by the ruling class.
That ruling class will now do its utmost to make sure as little of that money finds its way into our pockets as possible.
This means there will be huge pressure on companies to close down their pensions scheme, or shut it to new entrants, or to downgrade “final salary” schemes to less generous alternatives.
There will be pressure to raise the pension age – which will mean less money being paid out to fewer people.
Of course many of these pressures already exist. Several major companies have shut down final salary schemes in recent years.
Only 17 percent of such schemes are still open to new applicants, down from 28 percent last year.
We have also seen a series of changes in public sector pension schemes, all of which have been detrimental to workers.
As the economic crisis puts yet more pressure on pensions, the issue can become a flashpoint for resistance. Workers at the Grangemouth oil refinery won significant concessions when they struck over pensions.
The CWU postal workers’ union is currently in dispute over a massive attack on the Royal Mail pension scheme.
We should also fight for a decent state pension for all – and stop the speculators from using our money to gamble on the stock exchange.