A Faustian Pact that could hurt us all

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Cut is the branch that might have grown full straight

In a potentially disastrous development to the negotiations around British Steel’s pension benefits, the Government is  considering allowing the rights of British Steel workers (including those drawing their pensions) – to be cut.

There is no precedent for this. Pensions law would needlessly be sidestepped for no good reason. There would be many consequences , most of which are yet unknown.

The move would introduce uncertainty around all defined benefits. As Mickey Clark is currently telling listeners to Radio 5 Live, this undermines rather than builds confidence in our pension system.


A Faustian Pact?

In Kit Marlowe’s play , Dr Faustus strikes a deal with Lucifer: he is to be allotted 24 years of life on Earth, during which time he will have Mephistophilis as his personal servant. At the end he will give his soul over to Lucifer as payment and spend the rest of time as one damned to Hell.


A bit extreme?

Yes, the analogy is sensational and deliberately so. Marlowe’s play resonates today because it is a parable about morality , short-termism and the rule of law.

Superficially, this measure is attractive

The (reported) cut in benefits being considered would cut the value of the increases of the pensions, not the pensions themselves and could be considered -in the short term – better news for current employees.

The reduction would reduce pension benefits to a level which the trustees can pay while prudently managing the assets available.

All other defined benefit occupational pensions would be saved a hit to the PPF and potentially increased levies.

But like Faustus’ pact, this has long-term consequences

By throwing away the current framework for dealing with basket-case pensions, the door is opened to other defined benefit schemes to do away with similarly obscure promises.

For instance the statutory minima increases on guaranteed minimum pensions (one of DB schemes biggest current headaches.

For schemes with long recovery periods (British Airways, BHS and many others), the only thing that a sponsoring company would regard as set in stone could be the contribution rate.

Ironically , this is a return to a world where trustees rely on the market and work with sponsors to do their best (best endeavours).  Having decided to put CDC on hold, the Government would have re-introduced it as a defined benefit alternative.

 

The PPF other alternatives are available

The PPF has been avoided before, most notably by the Trustees of the Kodak Eastman pension scheme who used the ongoing concern, the film company to become an asset of the pension scheme and pay its profits to pensioners rather than shareholders.

For this deal to work, the trustees had to get the a vote of  agreement of those working in the pension scheme to take a cut in pension benefits, which they did. Similar votes have taken place at other private companies where members have agreed to give up pension benefits for job security, Centrica being one.

These hard-fought agreements have been worked out between members, trustees , unions , sponsors , the Pensions Regulator and in some cases the administrators of an insolvent employer.

This is not what we see being imposed at Tata.

 

The PPF is big enough and strong enough to deal with Tata, BHS and more

The PPF is a well run pension scheme, rather better run than the schemes it has taken over. I won’t criticise Tata’s scheme as poorly run, I don’t suppose it was. I don’t criticise BHS’ scheme for being poorly run either.

But I don’t see any reason why the Trustees of Tata would be able to run the pension scheme better than the PPF would run it for them and there is no certainty that, after taking one hit, some members would not have to take a second hit down the line if the Scheme lost its sponsor in future.

Some members of the Kodak scheme, chose the certainty of the PPF’s reduced benefits to the uncertain benefits of the ongoing arrangement (which might have seen a similar double cut).

These decisions were tough, but were made by people fully engaged with what they were doing. They were not made for them from above.

In his evidence to the DWP and BIS select committees, Alan Rubenstein made it clear that the PPF was in no short term danger of going bust and when pressed on the impact of BHS (and others) gave hope for the foreseeable future. We have a strong PPF.

Having set the PPF up, managed it well and established rules to the game that everyone is prepared to work to, the Government is appearing to drive a coach and horses through the building, to the great peril of those with certain promises.


Time to say something

I hadn’t meant to comment on Tata or on BHS again, but to let due process happen. But the report on this has been leaked through the BBC and is therefore not idle tittle tattle. The FT have also run with this story and John Ralfe and Steve Webb are on the case.

Steve Webb had the same thoughts on Wake up to Money as I had listening. I would be very surprised if John has any different.

Though I differ from John on how we find a long-term resolution to the problems with defined benefit guarantees, I am totally in agreement with the comments he has made on twitter over Tata and its pension scheme.

The Government are going about this the wrong way, putting political expediency over the long term interests of Tata Steel workers, their families and most importantly the pensioners and future pensioners of other schemes

 

 

Cut is the branch that might have grown full straight,

And burned is Apollo’s laurel bough,

That sometime grew within this learned man.

Faustus is gone; regard his hellish fall,

Whose fiendfull fortune may exhort the wise

Only to wonder at unlawful things,

Whose deepness doth entice such forward wits

To practise more than heavenly power permits. 

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Kit Marlowe

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to A Faustian Pact that could hurt us all

  1. Bob Compton says:

    Henry,

    Here is food for thought, an analogy. How would all the purchasers of RPI index linked gilts feel if the government because of it’s failure to balance it’s budget unilaterally decided to change the index from RPI to CPI with effect from 1 June. There would be an outcry from all bond holders that the British Government’s promise was not worth the paper it was written on, with all the implications for raised interest rates. [Hang on that might not be a bad thing.]

    The Tata Steel pension problem has been created by forces outside of its control, namely the banking crisis, the effects of the remedy i.e. Quantative Easing. The slow down of the world economy leading to desperate measures (Chinese steel dumping), is another symptom.

    A sensible solution may be for the Government to do as they did for the Royal Mail, and that would be for the Treasury to offer to take the British Steel Fund liabilities and assets but with CPI inflation protection as the price of a guaranteed pension, and an improved alternative to entry into the PPF.

    But passing an emergency law to allow the fund to pay CPI rather than RPI would have dire consequences for the entire foundation of UK pensions. Trust that the industry needs to rebuild will be lost forever.

    By all means allow the British Steel members (current, ex and retired) alternatives to the PPF if they are viable and are individually contracted, (as in contractual compromise agreements), but as you article alludes the road to hell is paved with good intentions.

  2. Nick Rumble says:

    I will leave others to raise the questions of morality, as for sensible solutions we can just hope. Invoking the problems of Tata Steel as being unique, surely all UK private pensions have to contend with the same forces outside of their control? It would be shame if the UK government caved in to a purchasers negotiating position; the scheme is relatively well funded. What strikes me about this is the hypocrisy,on the one hand an apparent unseemly desperation to please Tata buyers and on the other the wringing of hands at the plight of BHS pensioners, and mere bluster in the direction of Arcadia and its advisers-double standards or what?

  3. chris clarke says:

    Just about every large [ and small] pension fund in the UK – and probably most of the rest of the Western World is being run as one large Ponzi scheme – TATA / BHS – There just the tip of the iceberg right ? I mean nobody can seriously believe that pensions are going to pay out or that assets are going to match liabilities – and this is after God knows how many trillions of useless money have been pumped into the system by clueless Central Banks – so what now if [ read when] there is another 2008 [ 2008 just the warm up for the next one as we’ve learned no lessons at all] and the FTSE trades below 3000 taking all commercial and residential property down with it … and Gilts tumble as it becomes apparent that Governments cannot possibly pay back their debts either ? What exactly is the pension industry doing in preparation for an event so obvious my 5 year old can work it out ??? If the money is not there there how can these funds payout ?

    Before you shoot me down too heavily I’ll just say this – I called 2008 – that too was pretty obvious [ Im no genius at all but when your lending money to people who cannot possibly pay it back then its fairly obvious] – and to me the next crash [ between Sep 2016 and Dec 2017] will make 2008 pale into insignificance ? What are the Pension funds doing about this ? Relying on out-dated concepts of portfolio management that were proved broken in 2008 but upon which they still rely ????? Unreal !!

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