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.
Kit Marlowe