The FT has broken tbe story that $700m of the $3bn profits declared for the last three months of 2023 were attributable to a pension tax windfall.
The $700m relates to 10% of the $7.9bn surplus in its DB pension scheme and results from the announced (but yet to be enacted) reduction of tax on the return of surpluses from 35% to 25%.
Because BP has previously reported the surplus net of tax in its accounts, it is simply continuing that convention. It would argue this is a “not news” story. But of course it is for BP and for other organisations with pension surpluses, huge news for shareholders.
Even if this is not so much a story about pensions but about accounting conventions, it highlights the crucial importance of a pension scheme to the financial wellbeing not just of members but to the sponsoring employer.
The FT report
The group said it did not currently intend to extract surplus from its pension.
so the profit is technical rather than realised.
The shareholders may well wonder why a £7.9m surplus cannot be returned to them following historic deficit contributions,
BP’s current and future pensioners will equally question why they cannot be granted the pension increase requested for them by their trustees. There needs to be some common ground and this news may well go some way to creating it.
The BP Action Group
Early in 2023, the Trustees of the pension scheme requested of BP that in addition to the 5% increase to pensions promised by the scheme rules, the scheme paid 4% as a discretionary increase. Although this did not fully inflation link the 2023 payment , this was roughly in line with member’s expectations that in times of a surplus the scheme would provide full inflation protection, a practice it had always honoured.
The company turned down the request, to the indignation of members of the pension scheme, more than 2,400 of whom clubbed together to form an action group. The BP Action Group pointed out that this is the first time full inflation protection has not been paid and that it sets an alarming precedent.
In 2023 , BP was rumoured to be exploring a buy-out of the scheme’s liabilities with insurers. The buy-out would have absorbed most of the pension surplus , depriving both the shareholders and members of a share.
The precedent could sweeten the deal any insurer(s) buying out the scheme as it would crystallise the liabilities as “non-discretionary”. The Action Group saw their interests and those of the shareholders as conflicted.
This news that the notional surplus has , net of tax, increased by $700bn, is unlikely to appease frustrated members in the BP action group who cannot understand why their reasonable expectations have not been met.
Indeed they are likely to find the news that their pension is now the source of windfall profits to the shareholder (and a fillip to the BP executive) , hard to swallow.
Last year the 2,400 strong BP Action Group wrote to parliament pointing out that
BP Pension Fund assets are £20bn (UK), £27bn (total) (1)
The UK pension plan had a surplus of £6bn (2)
There are some 60,000 members in the UK DB scheme (3)
o 33,000 pensioners
o 10,000 dependents
o 17,000 deferred
Of these, some 16,000 are aged in their 80s and 90s.
The average BP DB pension: £18,000 pa(4)
It now looks economically more literate for BP to retain its windfall and find a way to persist with retaining its pension scheme.
The decision has important political and economic consequences beyond BP
If the impact of the Government’s reduction in taxation on surplus extraction is to keep BP’s scheme “running on”, it will have both preserved the surplus and captured the windfall. If it buys out , the windfall and the surplus will be lost to the balance sheet.
The Mansion House reforms are predicated on the support of trustees and sponsors to commit investment strategies to long term assets providing productive finance. This cannot be achieved through buy-out , where real assets are converted to debt.
By running on , BP can also take the opportunity to put the scheme assets to work, offsetting the damage that fossil fuels are doing to the sustainability of the planet and ensuring that its funds matter to those wishing to improve social and governance factors in the UK. This is in line with BP’s corporate strategy as we will see.
But here is the snag.
Is BP the kind of organisation strong enough to support a just transition in its core activities and long-term growth plan for its pension scheme assets?
Or is it an organisation that considers more important, the “de-risking” of its balance sheet? Is de-risking worth the sacrifice of some £5bn of assets (the rumoured cost of buy-out over technical provisions)?
Here we come to the nub of the issue, as I and the FT see it.
To help cut BP’s emission, former CEO Bernard Looney initially pledged to reduce oil and gas output by 40 per cent by 2030. He pared that back to a 25 per cent cut in February last year. However..
BP is the only group committed to cut oil and gas production in the sector, meaning it will produce about 2mn barrels of oil equivalent a day at the end of the decade.
To achieve BP’s ambitious transition plan, shareholders are going to have suffer considerable pain, pain that some shareholders aren’t too keen on taking.
Activist investor Bluebell Capital Partners, which owns a small stake in BP, wrote to the company’s board in October, calling on it to ditch the commitment as well as other key parts of its transition strategy
Despite its record profits in 2022 of £27bn and better than expected earnings in 2023 of £13.8bn (which lifted the share price 4.8%), BP’s market capitalisation has still only grown by 2.8% over the past twelve months.
The dilemma for the newly appointed Murray Auchincloss and his new CFO , Kate Thomson, is that BP cannot do it all on their own. Perhaps they need more help from BP’s pension scheme, help not just from accounting conventions but from the pension scheme surplus itself.
Auchincloss said investors could expect him to be more “internally focused” than his former boss, who led a high profile public relations campaign to reshape BP’s image as a champion of the energy transition.
“More of my time will be spent inside the company,” he said. “We’re in a time period where the organisation really needs to think about which investments it moves forward with.”
Let’s hope that the investments it moves forward with include a renewed commitment to its pension and the untapped wealth it can bring to shareholders and members.
Running the pension on can bring the interests of members and shareholders together and mean BP can support rather than ruin the planet.
The interests of pension scheme members and shareholders can and should serve their own good and the greater good.
1 BP Annual Report 2022 s24 p231 – $25bn (UK), $34bn (total) converted at 1$ = £0.80
2 The $25.1bn fair value of the UK assets minus the $17.5bn future UK benefit obligations at 1$ = £0.80
3 BP Pension Fund – Trustee’s Annual Report and Financial Statements 31Dec21 p11
4 Benefits paid (BP Pension Fund – Trustee’s Annual Report and Financial Statements 31Dec21 p26) / no. pensioners + dependents (p11)
5 Putting so-called employment hygiene factors to one side (e.g. holiday entitlement, maternity leave, etc) because legislation has improved this aspect of employment
While I don’t immediately have access to the BP Pension Scheme Trust Deed, I would guess that the wording regarding discretionary increases would follow the requirements of the old Inland Revenue maximum pension Rules, and be something like the following:
“If in respect of any period the rate of the increase in the RPI is greater than the rate of increase pursuant to the preceding sub-Rule [which provides an annual increase in line with RPI up to 5% – the indexation requirement under the Pensions Act 1993 – my insertion] in any pension in payment, the Trustee may (but only with the consent of the Principal Employer) increase such pension to such extent as the Trustee may think fit but not so as to exceed the maximum pension which could have been paid to the Member, Member’s Spouse or Dependant Child under the Benefit Limits increased in proportion to the increase in the RPI since the date when the pension first came into payment.”
While, as a non-lawyer, I don’t want to get involved in the principles of Equity and Trust Law, the Principle Employer may recognise that it may still need to fully index the pensions at some time in the future (e.g. before buy-out) and is seeking to defer the application (e.g. to a year when inflation is below 5%).
A more likely reason is that although:
• the discretionary increase is provided for in the Pension Scheme Trust Deed;
• the extent of that discretion is specified;
• is awarded by the Trustees and not at the discretion of the Company (merely its consent is required);
• and in determining the current service cost of the pension benefits granted during the year assumptions are made about all potential benefits under the Deed provided by that year of service including discretionary and conditional benefits (most typically including enhanced ill health early retirement pensions);
I understand many auditors in their interpretation of IAS19 require the cost of the discretionary benefit to go through the Company’s Profit and Loss Account during the year as a past service cost. Whereas if the assumption of future RPI, for example, exceed the previous assumptions, the rise in the pension scheme liability is not regarded as a P&L cost but as a restatement of actuarial assumptions taken “below the line” in the Statement of Other Comprehensive Income.
This treatment results in the cost of the same pension benefit going through the Company P&L A/c on two occasions possibly many years apart: firstly as an assumption in the year in which the benefit was accrued; and secondly when the benefit was granted.
Quite simply in 1990s the chief executive put in place a corporate policy pledge to ensure that the pension scheme would be funded to ensure that it could and would meet RPI. The scheme has a 5% hurdle at which it has to get concuurrence from BP. Initially The 5% hurdle for the Trustees to need to refer the decision to the Company was processed properly.
That was the time when i became a deferred pensioner and left the company with that promise in my pocket.
For the next 20 years or more the question did not arise as inflation was low.
Then inflation took off and i know not what decision process determined that the increase over 5% would not be honoured by the company.
As a result my pension is 11% short on what it should be and we await to see what happens next.
The scheme is substantially in surplus, does include substantial AVC and transferred benefits. So pensioners are asking some difficult questions.
Mr Oldie, this sounds a very strange way of accounting for pension granst.
It’s a brilliant slight of hand to filter £7.9bn away from BP to the City. Bonuses and fizz all around ( apart from the members !).
UK pension regulatory overreach has gone mad.
Basically, BP trustees ( no doubt with an arm up their back from management ) are saying the uk regulation is so onerous and off putting that they feel happier giving away £7.9billion pounds of surplus (to insurers). That’s £7.900,000,000.
In what logical world will one set of shareholders (BP) be happy passing over excess assets worth £7.9bn to another set of shareholder (the insurers). Of course this really is just moving the deckchairs around so that the institutional shareholders can keep their sector allocations tidy. There will no doubt be a huge level of crossed holdings with many of the shareholders holding both BP/ Insurer shares.
Now, here is the real slight of hand that the professional investors and fund managers are playing here – the surplus when in the scheme (and it is a SURPLUS) should in the first instance be considered to augment or inflation proof benefits. But once it is filtered through to the insurers in a buy-out, that exact same expected surplus will be drip fed through the insurers profits to institutional shareholders. So by clever slight of hand, the £7.9bn of surplus that rightfully should be allocated to either / a mix of BP shareholder/Staff/Scheme members, ends up in the hands of institutional managers and city wiseguys.
I think it’s called a redistribution of wealth, but not as we’d expect such a thing!
Where are the regulators to protect against the powerful
When we look at BP plc and the way it’s board has now twice refused members of the DB Pension Fund any RPI increase over 5%, we note that the Company state that they have to be cogniscent of the needs of all stakeholders and therefore a full RPI increase was not acceptable. However, when the same Company looks at the salary “needs” of its senior executives it is quite obvious that “cogniscence of the needs of all stakeholders” is not a concern! From the figures quoted in relation to Mr Bernard Looney it would appear that the CEO’s salary over the 20 years since I retired has increased by something like 10 times. If only my pension over the same period had increased by that much…
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