People do not stop growing old and needing to stop working.
I ran a blog about the infinite horizons of pensions, I was writing in 2020 when the idea that our pension system would be generally in surplus was ludicrous. I argued that it was and that the PPF would not be eating it over the next 10 years.
The threat is not indeed coming from the failure of sponsors to meet obligations, they have done – magnificently. I can understand why executives and owners of privately owned companies are tired of pensions but like many readers of this blog, I urge them to be patient and to remember the infinite horizons of people growing old and needing pensions.
The short-term outlook of CFOs and the shareholders of sponsors of DB plans makes the offers of insurers to buy-into the pension liabilities and then buy the scheme. How many are taking a ten , twenty or thirty year view of their pension?
I met with a now senior pension director yesterday and we discussed the importance to his company of those who had left – either to work elsewhere or to retire. They had no importance to the company, but huge importance to the pension scheme.
This needs addressing, we did not set up a corporate pension system without regard to the beneficiaries being of no economic importance of the sponsor, there was another reason and unless companies can remember it , then selling pensions to insurers and their private equity owners will continue to be a painless alternative to the pain of the past 20 years.
The grumpiness of my correspondents is that they can see the advantage of pension schemes running on to everyone who has an interest in the members, the sponsor and the scheme’s capacity to do well for the country.
I am pleased that some readers are taking the time to make their feelings known and I re-publish the comments of those who have done on the blog earlier this week on Rolls-Royce and their highly congratulated sale of their pension liabilities to an insurer.
They appeared in this order
I include the statement by Rachel Reeves
What followed was another comment befitting of “for the many”
There are many members of the Rolls Royce scheme who are being asked to accept this arrangement.
The risks of an overseas private equity fund owning UK pension liabilities does not look like insurance to me either. Paul Brine joins in
There have been several financial failures this century and an insurer did go bust for pension promises at the back end of the 20th Century. We are happy enough with the risks until something goes wrong. Thank you Paul, I heard the same complaint from a senior pension director yesterday morning. He is waiting to pack his bags and go into retirement.
Here we come to a hobby horse of the former CEO of a listed British Company, William McGrath, but I suspect that “For the Many” is of the same mind – not the same person.
We are going through the dismantlement of many valuable pension schemes which took many decades to build up. The time it takes to organise the buy-in and then buy-out of these schemes is measured in years not decades.
It is no easy business and the cost of transitioning to insurance has to include the fees of many professionals. It is lucrative but unnecessary work. Most pension scheme would be better run off as pensions.
We are transferring the liabilities that will continue for many decades to come, longer than the CFOs and shareholders or private equity companies care to ponder. But that is the business of pensions and it’s a business that will still matter to people in the 22nd century.
I agree that we really need to direct our attention to the company boards and CFOs who in my opinion have mistakenly sold Company Assets namely the DB Pension Scheme’s assets at a discount (approximately 40%) to the true value of those assets to the Company.
Pension schemes assets are on the Company’s Balance Sheet and are valued objectively at the “Fair” Market Value. The income generated by those assets also adds to the asset value and is used to pay the company’s deferred remuneration pension promise. Company contributions into the DB pension scheme whether related to current employees or as deficit recovery contributions are therefore merely transfers from one company asset (cash) to another asset (the pension scheme assets).
The problem appears to be that accounting conventions have lost sight of the true cost of meeting the deferred remuneration promise by requiring the deferred remuneration promises made to be valued as a liability which is not measured at the cost to the Company (? represented by the Best Estimate or Neutral valuation). Instead they are valued for the Accounts basis on the assumption that irrespective of the actual assets held that those assets will generate a yield equivalent to that on a freshly issued AA rated corporate bond. Worse still TPR’s Technical Provision’s measure which may mandate further transfers from the Company’s cash assets to their pension scheme assets are valued on an extremely volatile and at times excessively low risk basis which has no basis in reality except an inverse relationship to the profit margin that could be earned by an insurance company buying out or buying in the deferred remuneration promise as defined at time of the transfer.
What is 100% certain however is that the liability measure will not represent the reality of using the pension scheme assets to meet the deferred remuneration promises, unlike the objective measurement of the assets.
The reality of the reduction in Company Assets (if any) from the run-on payment of the defined benefit pension payments offset by the investment returns achieved on the assets will only become clear if the pension scheme runs on.
The fiduciary duty of both the Pension Scheme Trustees and the Company Board is to ensure that in the sale of the pension scheme assets they are getting a fair price for the assets being sold as part of the risk transfer transaction. This should reflect the potential future impact of the loss of those assets to support the business going forward.
The old jibe about British Airways being a small airline sitting on top of a large pension scheme perhaps should have been restated as a large pension scheme supporting a small airline!
“The old jibe about British Airways being a small airline sitting on top of a large pension scheme perhaps should have been restated as a large pension scheme supporting a small airline!” – agreed!
British Airways offloaded £4.4bn in pension liabilities for its smaller DB scheme to L&G back in 2018 in an effort to cap some of its pension responsibilities. The value of the remaining insurance contract buy-in at the end of 2024 was just under £2.8bn.
Parent company IAG’s market cap is around £18bn. Still slightly smaller than the total assets of the two BA pension schemes, but at least the accounting position at the end of 2024 showed a net surplus, rather than net deficits back in the day.
Maybe the old jibe no longer applies?
Under the triennial valuation of the larger BA scheme, which still showed a deficit as at 31 March 2021, for the year to 31 December 2023 no dividend payments, however, were permitted from BA to parent IAG.
In respect of the year to 31 December 2024, any dividends paid by BA were required to be matched by contributions to NAPS of 50% of the dividends paid.
In the period from 1 January to 30 September 2025, any dividend payment from BA to parent IAG exceeding 50% of the pre-exceptional profit after tax will require additional payments to be made to NAPS if the scheme is not at least 100% funded.
BA dividend restrictions cease, however, from 1 October 2025 onwards.
BA must still maintain a minimum cash level of £1.6 billion at the date of declaration of any dividends, as well as immediately following payment of any dividends to IAG and any associated matching contributions to NAPS.
The amount of any deficit contributions and dividend matching contributions in a single financial year is, however, limited to £300 million.
So I’m afraid I can’t share PensionsOldie’s view that the DB pension schemes support the airline. They still look like a drag or a headwind to me.