Money worries

Happily I do not lie awake worrying about money. I sympathise with those who do.

Yesterday I was speaking with the Finance Director of a small company who told me how her sleep patterns were interrupted by a recurring nightmare. Each year she has to put a number into the accounts of her company, the amount of money her company owes to its pension scheme to guarantee promises made to her employees and ex employees-her “FRS17” number.

Her FRS 17 number is her nightmare. The size of the number governs how much her company can borrow, the rate it which it borrows and the cost of servicing its existing borrowing. It governs the company’s capacity to invest in new equipment, employ new staff and plan for acquisitions. If the number grows then it can even put at risk her company’s ability to continue trading, putting her and her staff out of work and wiping out the capital owned by her shareholders.

She told me that she felt this was a problem that only she properly understood and that she felt personally responsible for this number. She admitted to being a control freak and what “freaked her” was that she had absolutely no way of predicting what this all important number was going to be. Even days before her financial year-end, the number might be quite different from what she had to account for a few days later.

She asked me to imagine her situation by thinking about mine. “Imagine”- she said, “what you have promised to pay for in the next twenty years”.

I thought about it. I am on the hook to pay my mortgage, pay for my child’s school fees, build up money for my retirement and pay my ex-wife a fixed amount each month. My mortgage is at a fixed rate above bank base rate, my retirement income depends on investment returns and annuity rates, my alimony is linked to RPI. If I was called upon to produce an FRS17 number for my personal balance sheet I wouldn’t know where to start.

She explained to me that my obligations to my child,my wife and my mortgage company were long-term and even a small change in bank interest rates, RPI or the anticipated rate of increase in school fees could have a major impact on my notional FRS17 figure. Since I have no assets (other than the equity in my house and the amount I’ve built up in my pension), I am relying on my future income to service most of these obligations. This is  big bet in an uncertain world and I don’t have much to fall back on (what she would call contingent assets).

Thinking about my personal situation, I could understand why she was worried- I was worried!

I asked her why she said she had no control of her FRS17 number. After all, her pension fund was supposed to be sufficient to meet its obligations. She explained;-

  1. She couldn’t control the size of the promise s made by the trustees of her pension funds – she wasn’t a trustee and though the trustees talked with her ,in the final reckoning “who got what” was determined by complex rules she didn’t fully understand.
  2. Every time she thought she understood the rules, the goalposts moved because her scheme actuary was constantly adjusting the scale of the promises – usually increasing them because of the increased life expectancy of the pension scheme members
  3. She had to account for the promises her trustees had made by reckoning the cost to her company of borrowing the money to meet any shortfall between the value of the promises and what was in the pension fund. The cost of borrowing changed dramatically depending on interest rates
  4. Although she had to produce an FRS17 number based on the cost of borrowing, the trustees invested the fund in equities which rose and fell independently of the rise and fall in the cost of borrowing
  5. With no control of the liabilities of her pension obligations, or their valuation or the investment strategy of the pension fund, she had no control of the FRS17 number and to cap it all, the calculation of the FRS 17 number was so complicated that she had very little idea what it was going to be to the last moment-when she had to publish it.

Fortunately, her company is well run and is in a position to pump money into the pension fund when the debt to the pension scheme requires it. She recognised that this was a priority for her company but she explained that every time she wrote the scheme a cheque, she yearned to have more control of what the next cheque would be.

There are of course ways in which her situation can be improved. The trustees could help her more by investing the pension fund in a way that reduced the volatility of her FRS17 number, she could get independent actuarial advice so that she could better understand how the schemes’ obligations were likely to change and she could buy technology that would allow her to calculate her likely FRS17 number well in advance of publication.

When we parted she thanked me for listening to her problems. I thanked her for helping me to think about mine. I came away thinking of the old proverb- “a problem shared is a problem halved”. I hope she will take control of her problems and that my firm can help her.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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