So far, Government has played nicely with pension funds, allowing them to agree investment strategies that have an eye to long-term growth rather than to regress into “de-risking”.
But pension funds are no longer run by well meaning amateurs but by corporate trustees working for firms that are capitalised by private equity. Nobody thinks that pension funds are some quiet backwater, they hold the keys not just to economic growth but to the business plans of the financial services industry.
The new pensions minister, Emma Reynolds, cannot be blind to this. After all, she worked for the lobby group TheCityUK for the past five years.
The Thames – more dangerous than glamorous
I am writing this within four yards of the River Thames which flows past me in Eton. Until last year I regularly swam in it; since getting ill last autumn , I haven’t.
The water is downstream from Little Marlow, where a treatment works has become notorious for dumping untreated sewage. Millions like me have started thinking of the Thames as more dangerous than glamorous.
Thames Water has gone from being a cosy utility , the boring bit of the Monopoly board , to a national disgrace. This week it has been in the news after it declared itself within 10 months of running out of money , needing to put up water bills to pay its mortgage bills (as if we don’t have mortgage bills of our own).
We are thoroughly sick of this water company and many others, whose financial shenanigans over the past 20 years have made loaded them with debt to the benefit of a few now very rich secondary bankers and the management teams who sat on the other side of the deals. Both have moved on and the current managers are left to sort out the mess.
Can its pension scheme help?
Thames Water’s two pension schemes are not basket cases. However, they require Thames to make deficit contributions which compete with other debt repayments for the limited runway that the operating company has.
As it stands , Thames Water’s Pension Scheme is a £1.7bn obligation around the company’s neck. It need not be.
Thames and its labyrinthine ownership structure is now such a weak covenant to the scheme that if the company is wound up, the scheme could fall into the PPF. This is not in the interest of members or the PPF, it is far better that a rescue package is put in place where an alternative sponsor is introduced that can create the conditions for the corporate contributions to stop and the members to get the comfort of strong corporate backing for the scheme.
I suspect that there is plenty of dry-powder lined up to help the trustees and sponsor run-on, they are certainly in no position to buy-out. The Pensions Regulator has made it clear that it supports both superfunds and capital backed journey plans that respectively allow pension schemes like Thames Water’s to become part of the solution to the productivity problem.
However, everyone from unions to private equity firms have been unable to talk to the trustees of the Thames Water Pension Schemes throughout this year. This embargo has apparently been put in place by the corporate trustee, Capital Cranfield. Capital Cranfield is one of the very few trustee firms not under the ultimate ownership of private equity and a business full of people I have a lot of time for. Nonetheless, it needs to ask itself why it is blocking talks that could materially improve the security of members and the capacity of the sponsor to continue trading beyond May of next year.
Can Government help?
Which is why the pension scheme and its impact on Thames Waters cannot be ignored by the new Government. Emma Reynolds has one foot in the Treasury and one in the DWP. One foot considers the economic impact of Thames Water’s predicament on the tax-payer, the other foot considers the impact of its failure on the pension scheme. Emma Reynolds is a two-footed Pension Minister who controls the midfield!
While nobody wants to see a nationalisation of pensions, we want to see pensions that have a future and their sponsors continuing to trade – if at all possible. Thames Water has made it clear that time is running out. Their customers are being asked to bale it out with higher water bills while its pension scheme appears to have divorced itself from its sponsor’s problems. Something needs to change and Emma Reynolds should be speaking with the Pension Regulator right now to get Thames Water talking to the market participants who can assist.