The FT has reported this morning that:
The pension deficit of FTSE 350 companies fell by a combined £8bn ($11bn) during 2017 thanks to rising markets, but fears over growth combined with the rising cost of retirement benefits mean boards continue to seek ways to offset risk.
That sounds like good news, but don't be deceived:
The combined deficit of FTSE 350 companies with final salary pensions schemes, which pay a guaranteed income for life, fell from £84bn at the end of December 2016 to £76bn at the end of December 2017, according to consultancy Mercer. The value of pension fund assets rose nearly 6 per cent to £781bn at the end of December 2017 because of strong markets for stocks, bonds and other assets.
To put it another way, this is just the measurement of a bubble. The real news was:
However, “liability values” – the amount required to pay retirement benefits – also increased by £36bn over the course of 2017 to £857bn, more than 4 per cent higher than a year previously.
Or, to again out it another way, thing are going to look one heck of a lot worse when the bubble bursts, as surely it will.
This takes me back, however, to the long term issue of pensions. First, let me reiterate that this deficit simply highlights a long term concern of mine, which is that the logic of mass pension saving represents one of the greatest examples of a fallacy of composition that there is. I explain why here. Because it is possible for an individual to save for their retirement does not mean that populations as a whole can.
Second, if this deficit is persistent and ongoing, and it is, whether or not the logic of pension saving is flawed or not there is the most massive fraud by false representation going on here. Such a fraud is defined as:
(1)A person is in breach of this section if he–
(a)dishonestly makes a false representation, and
(b)intends, by making the representation–
(i)to make a gain for himself or another, or
(ii)to cause loss to another or to expose another to a risk of loss.
(2)A representation is false if–
(a)it is untrue or misleading, and
(b)the person making it knows that it is, or might be, untrue or misleading.
Of course it is not fraudulent to run a pension deficit if you have every intention of clearing it. Persistently running such a deficit without clearing it is however, I suggest, such a fraud. It's saying that you have a liability that you will not take action to settle because it suits your own advantage to use your funds for another purpose. I think that falls fair and square within the spirit of fraud by false representation as defined above.
Third, what then can be done about this? I suggest what is required is obvious. I think a a matter of law any pension deficit must not be considered an unsecured claim on a company (albeit backed by some pension protections). Rather the deficit should become a special form of capital in the company. That capital would have three rights.
The first would be to appoint a majority of the board until the time that the deficit was cleared.
The second would be to take, as a preferred creditor, the entire proceeds of the sale of the company or any of its assets until such time as the deficit was cleared.
The third would be to require that sale if this was the only way in which the deficit could be cleared.
The object is to firstly protect the employees of companies and to secure the contractual promise made to them. The second is to give the most almighty shock to companies that will force them to honour their commitments. The third is to make clear that employees matter more than capital in a business. Because they do.
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Yon pension schemes o’ carles and quines;
I dinna fash; why shoulda?
I skimmed mah siller aff the tap,
and banked it in Bermuda.
I tend to link the mindset of companies on this issue with their attitudes toward, low wages, zero hours and the persistent lack of investment in training. I then look at ‘unrelated’ issues and find it hard to convince myself that the mindset is not driven by greedy, grasping, cynical exploitation.
“According to the ONS, as of Q1 2017, UK non-financial companies held £655bn of currency and bank deposits, up from £587bn.” ICAEW press release 26/9/17. The same report anticipates an increase in cash reserves through 2018.
Is my scepticism misplaced?
No
I look forward to the sale of Local Governments.
??
1)Pension deficits exist for final salary schemes because the promises made are now ferociously expensive in a low and suppressed interest rate environment. The deficits go up as interest rates fall and vice versa. The tax payer will fund public sector pension pensions but new enrolees will have less favourable terms going forward. In the private sector shareholders will ultimately have to bridge the gap otherwise the company will be declared bankrupt. Going forward no final salary schemes are likely to be offered in the private sector.
2)Going forward the vast majority of people will have defined contribution schemes where obviously a deficit isn’t relevant.
3)Regarding the concept of a pension, it is a long term savings plan to reduce peoples dependency on the state in later life and not to have to work until they literally drop dead.
Oh come on
Deficits existed pre 2008
And again, you really do need to do your reading
I provide links for a reason
Of course deficits have always existed because of the generosity of final salary schemes. As I say they are been phased out because of the complexity/ virtual impossibility of managing them.
But it is a mathematical fact that deficits worsen when long dated yields fall and vice versa. And we know long dated yields have never been lower.
And the sh@t really hits the fan if we have low rates and inflation as most commitments are RPI linked.
There is no corporate conspiracy here just final salary scheme providers (government and corporates) making a fixed conmittment 30/40/50/60 years into the future..now it looks an insane thing to do.
But you need to read why that commitment makes no sense
A commitment by the individual to save over the long term makes sense to fund old age where they don’t have the capacity to work – this is what pensions are for most people albeit with government encouragement presumably so they are less of a burden on the state.
Final salary schemes, god knows whose idea they were, complete madness.
DC –
Tax Professionals working for HMRC could earn a far higher basic salary, plus healthy bonuses, plus benefits (car, healthcare, share options etc) by working in the private sector.
Career Civil Servants have spent their lives working in service to the state – to YOU, in fact – for a reduced level of reward. They have effectively built up credit with the state that is given form by the pensions they receive. Civil Service pensions are seen as “deferred income”. That was always part of the deal.
Frankly, how dare you refer to them as a “burden” as soon as the state is required to make good on the contract?
In future, just think about what you’re going to say, and then don’t say it.
p.s. – under the Classic scheme (now closed), it would take a civil servant 40 years of working to get a full pension. The average civil service pension is in the region of £8K. I hope they don’t spend it all at once…
DC
Could I draw your attention to something else that has had a corrosive effect on pensions?
How about the Tories wonderful idea to give employers pension contribution holidays?
From an FOI request via my Union, my own Labour controlled Council employer took the opportunity presented by this ‘thoughtful’ policy and explains (1) why there is a big hole in our pension fund (because of budgetary cuts to LA s at the time meant that there was an incentive to cut employers contributions – thank you Nicholas Ridley) and (2) why my pension scheme contract is now not a final salary scheme but an average of my salaries upon retirement (which means less).
Final salary pension schemes are a good idea and make economic sense because they keep retired people able to spend in the economy which contributes to the economy turning over. Better income will also reduce the reliance on debt – a vulnerable part of the money flow into the economy.
To paraphrase Paul Krugman every one’s pension is someone else’s pension or income.
If you have an aging population (more people retired in society), who is going to spend in the economy? Who? If that aging population has less income but is larger than the non retired portion , there is going to be an impact on jobs, investment, etc.
This seems to completely pass by people like you DC as well as about 99% of all Tories and their voters.
This is not my blog but I would really appreciate if that in the future you would think before you open your mouth here. Do some research please. Thanks.
“Final salary schemes, god knows whose idea they were, complete madness.”
No they are not. I too like Geearky (I think) worked in the public sector and I was continually made well aware that I could earn twice my salary in the private sector. I saw my friends buying new cars and big houses which I could not afford. But I was not hugely concerned. It was very obvious to me that I was foregoing benefit now for benefit later.
I was offered very attractive pension terms to join the private sector too in addition to the better salary. Some private sector employers at that time foolishly assumed returns on investments would carry on at 5-6-7% or more as it was then. A gamble that mine and most public sector pension funds did not make. That to me was their obvious error. Just like the banks they thought the party would go on forever and were happy to make ‘generous offers’ and to go on paying their contibutions which were tax deductible anyway. Put simply it was a stupid assumption. They gambled and they lost.
And those kind of ‘generous’ pension offers were not made by the employer out of altruism. They were made because the employer thought he would make gains from the new appointment. His ‘generosity’ was actually directed at himself. But of course I accept that motive entirely. It is just the pretense that he is somehow a victim of an unforeseeable mad pension disaster that I won’t accept. He was the victim only of the consequences of his own judgements and choices.
And there is absolutely nothing wrong with final salary pensions. They are a great idea – that’s why all the bosses in the private sector still get them. (And the biggest bosses get huge handouts on top.) Nor is it insane to make projections about future commitments. It is absolutely necessary and every employer does it. The problem is how well they do it. But it is clearly insane to do it in the blase way it appears many of them have.
You seem very impressed that “it is a mathematical fact that deficits worsen when long dated yields fall and vice versa.” but that fact has always been true and it is not new or shocking. What has happened since 2008 is extreme in some ways but not completely unpredictable especially to an actuary whose business is to know what might happen over a period of 30/40/50/60 years. Looking back 60 years in 1990 would have been the great depression. Was it impossible to think the same thing might happen sometime in the next 60 years or that the runaway inflation of the 70s could not return or that more oil shocks could not occur? I am afraid it was actually herd mentality rather than careful calculations and circumspection that informed their decisions.
If pensions were as unforeseeable and universal a problem as you seem to think – a totally unforeseeable circumstance which came upon us all out of the blue then how do you explain the fact that my pension scheme (which happens to be the biggest in the country) is still able to meet all current commitments and “even on the new more conservative assumptions for future expected returns, shows a funding level of 94%?” And that is after 7 years of austerity and tiny bank rates. Isn’t the private sector supposed to be so much sharper in financial affairs than sleepy civil servants? If so how come private pensions aren’t in a lot better state than public sector pensions rather than the other way round?
I actually have a great deal of sympathy for private sector workers and to some degree their employers. But the situation employers are in is of their own making. The pretense that it is all beyond them and they are blameless victims is ridiculous.
Thanks
You make the mistake of comparing some private practice tax practitioners with all tax workers.
I’ve worked in both HMIT -as was- and private practice for a total of 29 years.
It’s just nonsense to suggest there is vast wealth just waiting for HMRC employees in the private sector. For a few but that’s all.
And of course it’s fraudulently misleading to mention 40 years to get a full pension and then £8k as the average pension as that average will include part time workers and those, like me, who only spent part of their career in the civil service. My 10 years in has earned me, at 55, an indexed linked £5.5k p.a. pension and around £17k lump sum. Had I stayed in the civil service my pension at 60 would have been c £40k p.a. index linked and with a £120k lump sum. I’d need a pension pot of £900k just to get the pension, never mind the lump sum. OK, so lucky for me my pension pot is well in excess of that and I fixed my lifetime allowance at the old £1.8m so I still have a little headroom but that’s been largely due to equity investments in companies I worked for and most of my contemporaries who left HMRC are not so lucky.
As a serial entrepreneur I’m sure Richard will know himself that wealth is rarely handed out free. I’m sure he is in a similar position, what with the long and varied and hugely succesful business involvement he’s told us about and well done him, he’s earned it.
But you would have earned a lot less
That’s why you left, no doubt: you were better off, pension included
And please don’t accuse commentators here of being fraudulently misleading when they are stating a fact
As for the cynicism: the politics of envy is really unattractive
Remember when….companies declared pension contribution holidays, and transferred the savings into profits? Bill’s figures on company cash holdings, executive remuneration, shareholder returns, not forgetting the vultures who swooped on pension scheme rich but moribund corporations and picked off the best bits from the bones of the cadaver, all suggest that the balance between the interests of executives, shareholders, employees and pensionable former employees is completely out of kilter, leaving the last two groups at the mercy of neoliberal market dogma while government seems not to care.
Where’s equity?
What about the USS University pension deficit? Should academics convert the deficit into cooperative ownership of their Universities?
I’m guessing you have a personal stake in the current Defined Benefits / Defined Contributions debate too. There may be a strike within a few weeks, so this is a topical issue.
Trevor
I am conflicted: I am a recent member of USS
But let’s not be silly, and your comment is not well founded if I might say so.
First, universities should be publicly owned and the USS proposal is clearly linked to their segmentation and privatisation
Second, government cannot have a pension deficit because we know it can print money: it’s nonsense to say otherwise
So this deficit only exists by applying private sector rules inappropriately