BHS and Tata Steel; they have a lot in common
BHS is a failed retailer, a tired brand with 11,000 employees and a medium sized pension scheme with a hole in it.
Tata Steel is a failed steelmaker, an iconic business (we know as British Steel) with 14,000 employees, a large pension scheme with a relatively small hole in it.
Both businesses are past their sell-by date. They have carried on this long because of the momentum of the past , and they appear to have little or no future without Government support.
We can argue about management issues and no doubt they are where they are for different reasons. The ongoing enquiry into the manner in which BHS conducted its affairs is not going to include Tata. But – bottom line – it is the pension promises of both that have sunk them.
And most importantly, what they have in common is ordinary people who work for them and are paid or will be paid pensions by them. These pensioners have the same deal. That deal is a promise backed by the company they worked for and a lifeboat called the Pension Protection Fund (PPF).
But BHS and Tata Steel are being treated radically differently – why?
Tata Steel seems to be a company that’s worth saving , the jobs must be maintained, the furnaces must remain fired. Yesterday the Government announced a consultation into how we could detox the Tata Steel pension scheme, putting forward a number of options that the nation is asked to consider between now and the Brexit vote (June 23rd).
A large part of the consultation is about the importance of Tata Steel to Britain, presumably the same argument cannot be made of BHS.
BHS is being allowed to slip into liquidation, its assets will most likely be sold off, where a store which is a going concern emerges , it will be snapped up at a discount by Mike Ashley or his like. The jobs at the remaining stores will go. The BHS Pension Scheme will go into the PPF, pensioners will get the PPF pensioners deal and those awaiting their pensions will get more or less 90% of what they’d hope to get.
A common lifeboat?
I haven’t yet had time to properly look at the special deal being put together for Tata Steel pensioners. I do not properly understand whether this is a “Tata only” deal or an alternative to the PPF for any employer who gets into trouble and is considered “strategic”. The special deal appears to include not just a switch from RPI to CPI pension increases but a loss of pre-97 GDP indexation and some rights to spouse’s pensions. The technical analysis will come later.
What comes now is the principal -based reaction to the paper.
As I said yesterday, we have a Pension Protection Fund which is solvent, well run and into which there is a clearly defined entry process. If Tata Steel declares it cannot meet its pension obligations and no employer is prepared to underwrite them, the law says Tata Steel’s pensioners go into the PPF and Tata Steel moves into administration.
I don’t want to see jobs lost or blast furnaces turned mothballed. But I can’t see why the Government should intervene on behalf of one set of pensioners and not on another. I can see every large employer in the country turning to their PR functions to plead they are strategic and I can see every large employer in the country wanting the special treatment accorded Tata Steel.
And I can’t see why a case couldn’t be made for Network Rail, Rolls Royce, Lloyds Bank , British Telecom, Centrica, British Gas, National Grid British Petroleum or any other of the part privatised companies that have been considered strategic enough to get Government Money – turning to the DWP with a pistol to its head, threatening to pull the trigger unless a deal to detox their pension scheme is allowed.
Political expediency drags pensions back into the mud
The fragile but brilliant settlement that has been made between private sector pension schemes and the Pension Regulator, that has worked so well these past fifteen years, is under threat. For what?
So that the Government can be seen to be on the side of the Steel Workers. So the romance of the Port Talbot furnaces can be maintained, so that we don’t have a political problem between now and June 23rd.
Once again (the last time being the ditched pension taxation reforms), pensions and pensioners are treated as a political football to be kicked into touch till Brexit is out of the way. At a macro-economic level, the Government’s behaviour is no more than cynical realpolitik.
But much more sinisterly, the policy being put forward puts the jobs and pensions of a steelworker above the jobs and pensions of a retail worker, for no reason at all. The shop worker has the same financial needs as the steelworker, the same rights to work and to pension. Why should one set of workers and pensioners be singled out against another?
Confusing politics and pensions destroys transparent governance
We are seeing a Zeitgeist towards transparency. To my mind that Zeitgeist is about telling things as they are and not dressing pensions up as something else. Andy Haldane cannot understand pensions, small wonder if a Steel Worker’s pension is deemed more valuable than a Shop Worker’s. David Cameron rails against the fund managers for obfuscation but is happy to put his personal and party’s interests (including Brexit) before open Government.
I do not know how this consultation about Tata Steel will turn out, but I fear it will not turn out well. I fear that those who are bargaining about the future of Port Talbot and the remains of our steel industry have already discounted the “giveaways” in the document into their price.
The fragile peace that the PPF has brought to the settlement of the defined benefit conflict risks being shattered by new legislation that further complicates pensions, sets boardroom against trustee, sets BIS against the DWP and drags pension recovering reputation back into the mud.
The Milk Pension Fund (Milk Marketing Board, Genus, NMR, etc) has already tried to ‘do a Tata’ on its own. Change RPI to CPI against the rules on basis scheme is in trouble. However, some employers seem quite healthy (or perhaps that is just a Genus subsidiary left holding the baby?).
Anyway, younger members seem to be disproportionately impacted, and those that enjoyed 1/30th accrual or 1/45th accrual with generous early retirement terms have largely retired already and had much of the benefit from RPI in the past on their pension. These types now sit as Trustees and senior managers in the business thinking up ways of transferring wealth from pensioners to shareholders. What happened to integrity?
The Tata scheme seems to have debts of around 3% of assets. That doesn’t seem a lot if the scheme assets are being properly invested! A recovery in the FTSE would help sort out a lot if that. Unless this scheme like the BHS scheme is largely in Gilts where the yields are so low – and likely to go lower – that there is an enormous requirement to match liabilities that can’t be met if you are achieving less than inflation when your liabilities are rising by inflation. Or have I missed something here?
“According to December 2015 figures, the scheme has assets of £13.3 billion and
liabilities based on running on with a solvent sponsoring employer of around £14
billion, so has a deficit estimated at around £700 million on a technical provisions
basis. However, the scheme is around £1.5 billion short of what would be needed
to buy out benefits equivalent to Pension Protection Fund compensation levels
(this is known as a section 179 basis in pensions legislation). The deficit to buy out
the benefits in full is estimated to be around £7.5 billion.”
Given that some of the assets will be matching assets to the equivalent liabilities, the growth assets have to grow far more than 3%. Without access to the actuarial valuation report (or accounts etc) I would “guess” that they probably have about £7 billion in growth assets which need to double in size to £15 billion in order to buy out the liabilities in full with an insurance company.
If someone has accurate numbers it would be good to know.
I’m with John, Doney not Ralfe, and wonder whether the “hole” measurements are fit for purpose.
I commented on an earlier blog that the BHS trustees seemed to have averaged just under 9% annual returns from 2001 to 2015, and a brief reading of the British Steel pension scheme accounts suggests that, at least over the last three years (which is not enough history for me) the trustees were making more than adequate investment returns. My one criticism would have been that the investment income averaged only 2.6% on such a large pool of assets, although increases in property investments may have been designed to improve that.
But I wouldn’t support John on “FTSE recovery”. Trustees need to improve the yield on the assets they have and stop looking back at the sponsor every time for a top up. And I don’t just mean the trustees at BHS and BS ….
What strikes me Henry is your assertion that the trustees can ‘prudently’ manage their funds and yet not mention for one moment that by definition they cannot – as the asset management costs will be unknown. Without the transparency of costs scheme members will continue to bear reductions in their benefits while financial service operatives continue to drive porches and sail yachts….the TPR and the PPF are negligent in not demanding a full transparency exercise as part of any rescue plan for a pension fund. Let us posture that both schemes have hidden costs of 3% of asset value in the case of BSPS a 50bps pa reduction could rid the scheme of its ‘assumed’ deficit in 5 years. Transparency does not just mean we can see straight through each cost point for each asset class it means the trustees could really deliver their fiduciary obligations to scheme member and sponsor by delivering the most efficient cost of production. Yesterday I negotiated with a small fund (£3.5bn) of a publicly quoted company to undertake a full transparency exercise before going to more drastic measure of closing the DB scheme. They had asked for cost data in the past and had been refused it by their managers..then they fell away in their task because they did not have the skill to press for the data. This is happening across our pension provision and until we get effective regulation like the Dutch we will flounder into collapse.
I doubt if the members of pension schemes will be impressed to hear that their representatives, aided by expensive professional advisers, enter into investment management agreements which they then fail to monitor effectively in terms of performance and costs, transparent or otherwise.
This is not new. Paul Myners reported as follows some 15 years ago now:
“The central role played by investment consultants in [the buying process for fund management] is immediately apparent. Most trustees feel uncomfortable about selecting investment managers themselves, because they feel they lack either the experience or the expertise to make the decision themselves. Even those who have experience and expertise rarely have the time to conduct qualitative research. Hence the use of consultants ….
“A situation where one party [the trustees] has legal responsibility for taking a decision but, lacking the necessary information and expertise, relies so heavily on a second party [the investment consultants] is not conducive to good decision-making.”
Therein lies the crux of the FCA’s current market review of asset managers and investment consultants.
The one useful public fact about the funding of BSPS I could find is its solvency funding level was 72% in 2014. A solvency discount rate would be somewhere near to a gilt yield. If BSPS can earn a return on its assets of about 1.8% pa more than gilt yield, it will be able to afford its benefits in full. 1.8% pa more than the current gilt yield of 2.5% does not seem an onerous target for growth asset returns. If BSPS can continue (current law might force it into the PPF upon it’s sponsors’ insolvency) it seems to me there is a high probability it can pay its benefits in full from the likely return on growth assets. If growth assets do not perform sufficiently well to pay the benefits in full, the time to cut benefits is after the assets have failed to perform, not before. It is perverse to propose that the cutting of benefits now is a suitable way to deal with the risk that benefits might, but might well not, need to be cut later.
Another way to look at this might be ‘lucky PPF” that is buying some very well funded liabilities on the cheap.