The FT reported last week that:
J Sainsbury's pension trustees have signalled to the consortium of private equity investors stalking the supermarket that it would have to tackle a hole in the pension scheme of up to £3bn to succeed in an acquisition.
There is nothing new about pension deficits. We've seen them on a grand scale since the 2000 stock market crash. What is depressing is that the attitude of those in the industry, and the trustees who administer these funds has not changed in the face of the evidence accumulated since then that simple throwing more money at this problem in the way we always have does not solve it.
What I mean is this: giving the J Sainsbury pension trustees £3 billion will not in any way solve the pension deficit it faces if they simply out it in the Stock Exchange. The reason is simple. 66% of pension fund assets are held in equities. Total equity issues in the UK in 2006 were £21 billion. Half the average UK pension fund's equities are UK based. The UK equity market was worth £1,931 billion at the end of 2006.
So, new issues of shares were 1% of market value in 2006. The ratios are worse in the US, the last time I looked. Putting £3 billion extra into the market does therefore contribute less than £30 million to real UK economic activity in the sense that it ends up in company hands to do fund some real economic activity. The rest gets sunk in the 'gambling pot' of the exchange itself. It's simply a reshuffling of money. nothing new is added.
And the value of that pot is based on three things. One is a shortage of supply. They keep prices up by making sure there are far too few new shares to actually meet demand. That's basic market manipulation for you. Second, is hype, which is why that £3 billion could go up and down in value without any consideration of what's really going on in the underlying investments. Third it's real economic returns.
Now here suddenly we face a reality. The additional £30 million or so that will go into the real economy if Sainsbury's make good their shortfall by pumping money into the stock market will not generate sufficient return to pay a dividend or generate a capital gain on £3 billion. You only have to think about this for a second or two to realise that's impossible. So, the reality is that putting in £3 billion dilutes the return real businesses are making over a wider pool of funds. That's all. And if everyone made up their deficit in the same way, guess what? Everybody's return would go down equally and the pension deficit would remain exactly the same.
The fact is that equity investment can't solve the pension crisis. Only direct investment in companies or in real infrastructure and other development, where the return will be made over the long run (which is when we want our pensions) will do that.
The pension crisis is far from over until we change our thinking. That's what I'm saying, in a nutshell.