15 February 2018
Time for reform
by J.R. Thomas
Sales success in the media seems to depend increasingly on digging up a scandal to make the public’s blood run hot and cold. The Telegraph, hardly the newspaper of revolution, began the latest shock horror surge with its expose of our elected (and indeed, non-elected) representatives’ creative interpretation of expenses claims. The Guardian and the Times have had several bites at a different cherry in their financial pages with allegations of mis-selling of insurance on loans (“PPI”, to those of you used to those unsolicited calls), and then there was the extraordinary behaviour of Royal Bank of Scotland’s business support unit – a unit ostensibly there to support financially failing customers, but one seemingly devoted to shoving them over the edge and taking possession of their assets.
Even the staid, if pink in paper and politics, Financial Times has belatedly joined the modern version of witch hunt, having no doubt been inspired by the alleged knee brushing exploits of government ministers to which it has added a business twist, dressing a couple of its journalists in sexy underwear and short black skirts (female journalists we should clarify), and sending them off to the President’s Club dinner in the hope of revealing bad behaviour among the black tied and exclusively male guests. Reading between the lines, not much occurred, but enough moral high ground was occupied to end the President’s Club and probably men only dinners as a form of corporate entertainment. Sexual excess is good for sales and seems set in for a good long run, encompassing politicians, business, film making, and now charities.
Yet all this journalistic digging seems to have missed what may turn out to be one of the dullest, but profoundest, financial scandals of our times – the slow decline and, sometimes, collapse of corporate pension schemes. The latest, and what promises to be one of the biggest, is that of the dramatically failed giant contractor and specialist service provider, Carillion. It does not quite rival, nothing does, the troubles of the giant British Telecom final salary scheme, where, as we reported a couple of weeks ago, the deficit – the estimate of future pension liabilities as against likely assets to cover pension payments – is around £14bn. And before that, the sale and subsequent collapse of Philip Green’s BHS retail group revealed a hole in the pension scheme of between £500m and £700m; the pension regulator together with maverick Labour MP Frank Field managed to persuade Sir Philip to do at least part of the decent thing and put £363m into the hole.
The collapse of Carillion probably has enough financial funny smells to keep a whole legion of journalists digging for the rest of 2018, but in terms of human misfortune, the saddest suffering will be that of the Carillion pensioners – many not pensioners yet, but currently workers without jobs and with a big scar on their futures. The board of Carillion, expanding and diversifying their business and short of cash, kept a tight rein on pension contributions even though the scheme was alarmingly underfunded – around £600m at the latest estimate. The same restraint though was not applied to dividend payments to shareholders, nor did it seem to cause much alarm to the Pension Regulator.
Carillion is far from the only business to be meagre in funding the company pension fund; GKN, in the throes of fighting off a hostile takeover bid from Melrose, is seemingly torn between making the pension fund deficit look as bad as possible (£1bn plus, perhaps) to deter the bidder, or not too bad (maybe £400m) so as not to alarm the future pensioners – or the Regulator. In fact it is increasingly difficult to find a company scheme which is not underfunded. To be fair, in the early years of this century the position was the reverse. Most schemes had become overfunded, due mainly to inflation rather than board generosity, and many companies took contribution holidays. Unfortunately holidays can become expensive habits, and so it proved in this instance; the crash of 2008 created many a funding shortfall but not one that employers rushed to fill, given the other pressures on cash flows and the general hope that something might turn up to refill the pot. But it hasn’t and the pressures get worse every day.
Indeed the current corporate pension fund situation looks increasingly like the tip of the iceberg, if one can imagine an iceberg (cold, alarming, blocking your whole horizon, liable to sink you) as an impediment to retirement planning. The stock market looks toppy, tax is high, cashflows are always under pressure, and the dear old pensioners just keep on living. Indeed the latter is becoming THE major problem – when our fathers retired at 65 and lived to be 75 ten years of pension payments was manageable. Now we might have to grumbly work on to 67 – but then, will be looking to live lavishly to 84, with another seven or eight years in some expensive healthcare facility. It does not require an actuarial degree to work out that 46 years of working will struggle to generate enough income to support 23 years of not working.
Which sort of lets the pension trustees off their moral hook, you may think. This degree of longevity has crept upon the western world very quickly. The trustees have responded as best they can, closing final salary schemes to new entrants, thus making the trustees’ potential problem the pensioners’ actual problem, and increasingly closing schemes even to existing participants (result: ditto). The replacement is money purchase schemes, by which the lucky employee gets back out what they put in and some growth, if the scheme managers are clever, or lucky. As the scheme may well be still under the control of the corporate employer, and funded by them, the nervous or risk averse future pensioner may feel their future to be not entirely de-risked.
You may think your pension fund is your money. But it isn’t, not really. It is not under your control, or the control of persons who have your best interests at heart. Those who run it probably work for your employer; they are certainly dependent on your employer to keep it funded and provide resources with which to run it. In a world of tight cash flows, failing contracts, hostile takeovers, and all the rest, the trustees of the company pension scheme are not heard much in the board room. And the board is not constantly thinking of the welfare of its employees in old age as it battles the challenges of modern business life. But why should it be? Whatever arrangements your employer agrees with you about paying for your post retirement sunlit excess, surely that money is your money – perhaps not to buy Lamborghinis with (though why not, if you are prepared to park it outside the workhouse) – but properly invested and if prudent, professionally managed and safeguarded.
So Mrs May, looking for a populist cause, and legions of journalists looking for a story and campaign, here it is. A major reform of the pension system, to ensure that the beneficiaries – the pensioners we mean – own that which will produce their pensions. Break the link between pension schemes and employers. Pension schemes of whatever format should be probably compulsory but certainly freestanding; the employer’s role will be to pay in to the scheme, on whatever terms agreed with employees. Approved pension funds and managers may well be required, as now, to restrain pensioners from those Lamborghini urges. But in the end the best guardian of his own interests is pensioners themselves; make us each responsible for our own finances even unto four score years and ten, and well beyond.