The FT has come up with some excellent research on why pensions find their way into the Pension Protection Fund. It has discovered that a substantial proportion of the so-called “pension failures” over the past ten years, resulted from sale and re-purchase arrangements (known as pre-packs). Pre-packs exploit a loophole in the 2005 Enterprise Act which allows management to walk away from pension liabilities through corporate restructuring.
A total of £3.8bn of pension liabilities have “gone to Croydon” home of the PPF. The haircut people take on their pensions entering the PPF is around 20%, so this amounts to a real loss to ordinary people of around £750m. Pre-packs are not crimes but they’re not victimless either.
The vilification of defined benefit pension schemes.
There has grown up a kind of thinking, inspired by management consultancies , that considers the defined benefit pension scheme a toxic threat to the balance sheet, to the P/L and to cash-flow. Extending this train of logic, pensions can be blamed for lack of investment , lack of productivity and a long-term loss of shareholder value. Since the architects of the pension schemes are several generations removed from a company’s current management and ownership, it is quite safe to blame the pension for everything,
For managers and owners who have no interest but shareholder-value, the DB pension scheme can easily become an asset to be exploited; if a corporate valuation is weighed down by a pension deficit, then transferring (dumping) the problem on someone else, immediately releases cash for the shareholders.
This is the corporate equivalent of fly-tipping. And yet it goes on under our noses (as the chart shows).
Why deficits are over-egged
It is in the interests of those for those who “de-risking” corporate balance sheets to talk up pension deficits. The propaganda war against pensions is being won by the major consultancies who bombard us every month with numbers based on the cost of winding up our pension system, because that is high on their agenda.
There is more than a hint of jealousy at play. The pensions that are paid are not being paid to the new managers and owners but to previous managers and owners (who were responsible for the architecture of the arrangements). Current managers and owners argue that they are only evening things out.
But this is to ignore those people who do not benefit from pre-packs at all, the ordinary pension scheme member who loses pension rights – at the shareholder and current management’s expense.
Put in this context, the incessant noise about pension scheme deficits is a direct attack on the rights of a generation of workers whose compensation was based on a company pension promise.
What can be done about this?
There’s no doubt that for many smaller companies, some form of de-risking of pension liabilities is right. The steps that most firms have taken- closing for new hires and now for future accruals, may well have been necessary. But what is happening now is going beyond reasonable and it must end.
As the FABI Index shows, the estimates of deficit that come from valuing pension schemes in worst-case scenarios, are wildly at odds with the valuations that take a more progressive view of the economy.
If we were to value GDP growth on the basis of gloomy pension forecasts, we would pre-pack the UK!
The first step in ensuring that DB schemes are not fly-tipped into the PPF is to make those who sponsor them (both employers and employees) aware that there are more ways to value a pension than against a risk-free discount rate.
The second step is for all interested parties, shareholders, members and trustees to align interests to ensure that no one party is allowed to dominate decision making (this is the idea behind the Pensions Regulator’s integrated risk management framework).
The final step is for pensions to be protected against the corporate vandalism, examples of which are quoted in the FT info graphic.
Turning the tide
It is really encouraging that responsible journalists are bringing this to general attention. Thanks to the FT (who I have been quite rude enough to in one week!).
There is no need to give anyone extra-powers. Gaming the PPF is an offence as is abuse of the Enterprise Act. What is needed is greater awareness, not just within government but without.
The tide will be turned when people sit back and ask – “if not pensions what?”
Dismantling the pension apparatus that made a generation secure has happened, other generations will not benefit as the baby-boomers will. That decision has been taken. But no decision has been taken on how the risk will be shared going forward.
Already we are seeing signs that the ultimate model of de-risking “pension freedoms” may be – for ordinary people – a cracked model.
There are dissenting voices (even in pensions) arguing that the pooling of collective pensions to provide long-term economic capital, should make pensions a source of productivity games (rather than the scapegoat for productivity stagnation).
The reasons that the majority of pension schemes go into the PPF is not usually bad pension management, it is poor corporate strategy and poor execution of that strategy.
Pensions are a convenient scapegoat for failures elsewhere. “Risk transfers” may look plausible in the boardroom but they impact the long-term finances of those on whom the company’s prosperity has been built. It is simply not good enough to use pensions as a trampoline for “value extraction”. A line must be drawn and not crossed and I hope that line is being drawn today.
The pension research in the Financial Times, on which this article is based , can be found at https://www.ft.com/content/f3f574fa-0f2c-11e7-a88c-50ba212dce4d