PENSIONS AND DEFLATION RISK

The latest acknowledgement from the UK Office of National Statistics that private pension assets have been overvalued by a factor of a one third, only serves to highlight once again the precarious situation of pension prospects (and hence economic ones too , since pensioners are going to big a big factor in future consumption) in many G23 countries. The effect of the stock market collapses on pension plan values is well know, but the comments of the UK Chief Statistician on the impact of protracted low interest rates should sound alarm bells in the heads of those thinking about the problems we may face if we hit a serious wave of general deflation.

A day after apologizing for drastically overestimating the amount of money in pension savings accounts, Britain's government ordered an unusual review Tuesday of the data used to value the funds. After initially valuing private pension savings at $132 billion, the government said statistical errors may have led it to overestimate the amount in pension savings account by $46 billion. The disclosure battered public confidence in Britain's pension funds at a time of rising anxiety about whether the pensions are adequate to meet the demands of the country's aging population.

Two high-profile companies also reported pension woes. Cash-strapped insurer Equitable was struggling to limit losses in its employee pension fund, while British Telecommunications denied allegations of a large hole in its own portfolio.

On Tuesday, National Statistician Len Cook announced a review of data, which the Department for Work and Pensions had called "urgent." The department had used official statistics in making the pensions estimate that it later called into question.Cook's Office of National Statistics, which supplied the department with the data, said the numbers could mislead if not interpreted correctly. In fact, Cook's office had already detected errors in its pensions data in January. It recalled the data, recalculated them, then issued a revised set of figures in May.

Demographic trends have increased the pressure on firms that manage their own employee pensions. Low interest rates combined with the increased longevity of Britain's working population added 45 percent to the costs of administering private pensions over the past 15 years, said KPMG partner David Fairs. With interest rates at their lowest in almost 40 years, companies must contribute more money to their pension funds to earn the same financial return for their employees. At the same time, an aging population strains the ability of pension funds to provide for all beneficiaries. Plunging stock markets have contributed to the problem. Because many firms have invested the bulk of their employee pension funds in shares, the collapse in stock values over the past year has eroded the value of those assets.
Source: Yahoo News
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