In an excellent article “Home of the Big Mess” Ivan Laws gives us his experience of watching on as a defined benefit scheme he administered was plundered by people who had the wit to use pension surpluses to provide themselves with an income for life.
Ivan has spent his life administering pensions – helping them to pay the right money to the right people at the right time- this is what he has to say.
The BHS situation is pretty abhorrent and headlines such as “BHS – the dark side of capitalism” have been screaming out in newsprint all week. No wonder when the company was sold for £1 to a twice bankrupt playboy.
Yet again I feel the self -righteous fires of indignation and judgement searing the walls of my soul; and yet again they are rapidly cooled by the uncomfortable reminder that I have seen pension deficits far larger than £571 million in balance sheets; and I have to question just how my industry; you know the one that is supposed to look after the retirement interests of shop-workers, sailors, steel-workers, coal-miners, teachers, firemen, NHS workers and anyone who has ever paid a pension contribution, has allowed such a travesty to arise.
You can get very sophisticated with discount rates, annuity rates, gilt yields, longevity, mortality and morbidity. You can puff up your chest and point out the declining fertility rates and improving life expectancies, but the dire situation that is pension funding has been in the making since the 1970s. I remember the phrase “contribution holiday” where pension schemes were so well funded that the employer stopped paying pension contributions for a period; all sanctioned by the actuary of course.
Did statisticians exist in the 1970s? Was the future demographic shape of our country impossible to predict? Was it rocket science that life expectancy might increase? Of course not, but who was going to suggest paying extra contributions or indeed any contributions when so much cash was sloshing around. Those savvy individuals who wanted to save extra for a rainy day pumped their money into Equitable Life and that’s another story.
Pension funds grew into very substantial lakes of glistening fresh water and the industry slaked its thirst; the concept of risk management was non-existent and the custodians of the water supply were asleep in their sheds; or worse. I worked on one very big pension fund where it was possible, indeed the norm, for a member with more than 10 years’ service to obtain a medical certificate for £10, be classed as permanently unfit for work and claim a full unreduced pension and maximum lump sum at a young age.
The Trustee board, which was composed of union men and employer representatives used to interrupt its beer swilling meetings to visit the bookie before the afternoon races.
It was obvious what was going to happen to this fund, even to a lowly administrator like me at the time, and eventually stringent new rules were introduced, but not before the final rush of union members, whose health had apparently suddenly deteriorated, slapped in their medical certificates.
We have had many Pension Acts since then, a Regulator with teeth and it will be interesting to see the outcome of the BHS debacle. But Tata Steel is looming like a spectre and there will be countless others. Most of these pension “crises” come with years of fore-warning…
My point is that all of this could have been avoided with stringent risk management, solid governance and an industry which focusses on its primary purpose, with ambassadors who can deliver a message that doesn’t want to be heard and who know how to make things happen.
I’ve no idea how accurate a representation this is, I wasn’t there at the time, but it has the ring of truth about it (and I’ve no reason to doubt Ivan).
Could the BHS Trustees have done more. There is a lot of finger pointing going on, plenty of it in this article in the Daily Mail. I can’t comment – but to imply the Trustees were negligent because of the length of the initial meeting between trustee and new sponsors is at best sensationalist, at worst irresponsible.
We need to be very cautious about blaming trustees in such situations, I am more concerned about what happened in the following year and what went on between trustees , Regulator and the Retail Acquisition Group in the next twelve months.
The glint of the bank vault.
If you leave the door to the bank vault open, people will steal the gold. Funded defined benefit schemes remain a huge source of wealth on which millions of British workers are relying for their benefits.
Bis, the GovernmentDepartment of Business Innovation of Skills is already conducting an enquiry into the BHS. On Thursday, the BIS committee announced the terms of its inquiry, saying the collapse of BHS had brought
“misery and uncertainty for thousands of workers and also places a potentially significant burden on the taxpayer in the form of pension liabilities”
The pension liabilities do not fall on the tax-payer, they fall on other pension schemes – via the PPF levy. Those schemes are ill-equipped to meet any extra expense
In a comment on my previous blog on BHS, Darren Masters writes
A recent survey also suggests between 700 and 1,000 companies may never be able to fund their schemes, but many of these adopt the approach of BHS – hang on while you can, fund as little as you can convince the trustees to keep quiet, and hope the day of the grim reaper doesn’t arrive any time soon!
That is why we need a Pension Regulator, strong rules and a clear social purpose for pensions.
“Restoring Confident in Pensions” is not just a slogan, it’s a mindset and the events of the past month remind us that we are nowhere near achieving it.
Another example to show how absurd is the defined benefit model. There are so many variables impossible to forecast and as the assumptions change the fund can quickly flip from surplus to deficit and back again. Even changing from RPI to CPI can have a huge impact and if such a subtle difference has that effect think about the more significant ones. Is that any basis to fund long term security?
I think I remember schemes being told by the Government that they were not allowed to be more than about 10% over funded in those days which was hardly anything when you took into account the ups and downs of the staockmarket. That was when they started taking contribution holidays.
Rings a bell with me too.
The ceiling was 105% (not 110%) but any trustees with half a brain between them and better advice could have used assumptions about members living longer and prudent investment returns to keep funding between 100-105%.
To blame the ceilings imposed by Inland Revenue or Government is an old excuse (and local government pension schemes were allowed to be funded at only 85-90% once upon a time), but it’s simply not good enough.
I was there at the time.
“The Trustee board, which was composed of union men and employer representatives used to interrupt its beer swilling meetings to visit the bookie before the afternoon races.”
A good line, and there may well have been a few examples similar to this to justify the anecdote. But hardly typical, at least in/withmy experience and knowledge.
I would join in the blamed the actuaries and investment consultants who abused asset allocation (to equity market benchmarks, then to “matching” benchmarks), forgetting that you pay pensions as they fall due out of cash flow. Cash flow from contractual contributions, but also from investment income and, when necessary, from planned sales of liquid investments.
Perhaps it was a case of the blind leading the blind-eyed?
So much of financial services and pensions has been similar to the story of the Emperors New Clothes. And yet, we keep finding that he is once again naked, does government never learn?