In 1991 the ebullient fraudster Robert Maxwell disappeared from his yacht in the Canaries and was found to have looted the Daily Mirror pension funds to support his crumbling business empire.  The inevitable and appropriate result has been far more extensive regulation of occupational pensions. The 2004 Pensions Act imposed extensive requirements on ‘defined benefit’ schemes, which promise pensions based on past earnings rather than individual contributions.

Government and paternalistic employers had always made provision for employees too old to work. But only in the twentieth century did many people live to retirement. Both state and private pension provision were extended and formalised. From the 1960s, employers large and small offered their workers pensions. These developments made a major contribution to the near elimination of pensioner poverty in the last two decades.

Pensions represent an implicit intergenerational contract. The bread pensioners eat is baked by someone working today. Both individually and collectively, we accept responsibility for our parents and grandparents now in return for an expectation that our children and grandchildren will accept analogous responsibilities towards us. The conceptual mistake which has underpinned regulation after Maxwell was to attempt to turn these relationships between generations into contractual obligations.

But this cannot be done. We do not know what will happen over the next fifty years and we cannot bind our successors. Employers and governments can make promises today but if these promises prove too onerous decades from now they can and will renege on – or more likely reinterpret – these promises. And they already have. Ask the women who thought they were going to receive state pensions at 60, or the pensioners who thought their retirement income was linked to RPI.

 In the pursuit of illusory certainty, regulation since Maxwell has demanded much higher contribution levels and imposed far greater administrative burdens. Schemes are required to commission a ‘technical valuation’, a costly exercise in fantasy which purports to value cash flows over half a century or more by making up matrices of unknown and unknowable numbers. The result has been that most private sector employers have closed their final salary schemes to new members and these will be run down over the next half century as members retire and die.

 The few defined benefit schemes that remain are mostly those which have a public sector history, but Royal Mail and BT finally closed their schemes this year, and the future of the largest UK pension fund, the Universities Superannuation Scheme, is currently the subject of fierce dispute. (A recent report from a Joint Expert Panel may begin the process of finding a sensible resolution)

Most employers have attempted to distance themselves from their closed funds by investing in long dated government bonds. They have been bidding for these securities not only against each other but against the Bank of England, which has been buying them as part of its programme of quantitative easing. As a result, their price has been driven up to dizzy levels, and yields have fallen. Treasury 2068 stock offers the princely return of 1/8 of 1% per year and guarantees to repay your principal, but only with less than half its current purchasing power. The certainty this bond offers an investor is the certainty of a miserable retirement.

The pension fund world finds itself in a doom loop. And the result aggravates the already yawning intergenerational inequity – people today at or approaching retirement are given greater security retirement while those at an earlier stage of their career are deprived of the security their forebears enjoyed. As with so much recent financial regulation, good intentions have led to counterproductive outcomes.

It may be too late to find a way of restoring retirement provision that helps workers maintain their standard of living and does not leave their fate too much in the hands of the vagaries of the stock market.  The general lines of what is needed are clear – a method of pooling the inescapable risks of long term investment by grouping employers together to provide insurance against the failure of any individual employer together with a level of contributions which achieves a fair balance between successive generations. Variants of this model are found in other countries. Indeed, one has long existed in the UK. It is called the Universities Superannuation Scheme.