- [T]he proportion of [FTSE 100] companies that cannot pay off their deficit in any realistic timeframe from discretionary cash flow has increased to 22% (the highest level in 3 years), and up from 15% last year
- Only 12 companies now show an accounting surplus compared with 21 the previous year
- However, if we add back dividends and capital expenditure to discretionary cash flow, over 94% of the FTSE 100 can pay their pension deficits in 1 year.
- Between end 2007 and end 2008 aggregate disclosed FTSE 100 deficits increased from around £20 billion to £40 billion. We estimate that at end June 2009 the aggregate deficit could be of the order of £80 billion.
- The allocation of business’ defined benefit cash spend between new benefits for existing employees and deficit funding (for past employment) is expected to move from a “normal” 2:1 ratio in our past surveys to 1:1 over the next year and potentially to 1:4 within 5 years. That is £4 in every £5 spent on defined benefit pensions will be for past losses not new benefits.
The time for funding reform is now. KPMG, of course, suggest that time is up for defined benefit pensions:
Businesses may now be forced to substantially increase funding. Many trustees, encouraged by the Pension Regulator, are taking a more cautious view of future returns than the accounting measure. This pressure to add further prudence at a time of economic downturn, and the risk the schemes represent to companies is resulting in companies re-evaluating the validity of defined benefit pensions.
No it isn’t. But there will be massive problems if capital spending is restricted whilst free cash flow is used by FTSE companies to buy each others shares to create a stock exchange bubble that defers recognition of the real nature of this problem.
As I have said, there are alternatives. One is a variation on an idea I have mentioned before — and which is in my part my creation — the idea the creation of a brilliant Swede. The first is to use pension contributions to fund real investment — something they rarely do now. This would be channelled into new jobs by providing funds to the government, local government, health authorities and other agencies so that long-term infrastructure projects could be provided. This proposal has three essential qualities: it makes economic sense, it has an implicit guarantee which makes it an incredibly attractive investment and it enhances the current options within the economy by finally laying the PFI scheme to rest, by creating a pool of funds for new public infrastructure investment which is essential at this point of time and by creating current and very obvious economic activity that makes the decision to invest in this way for the long-term acceptable to an electorate demanding current satisfaction.
The second option is a pension tax based on the pioneering work of Rudolf Meidner in the 1950s and 60s in Sweden. This would require that all companies employing more than a small number of staff each year to pay a tax settled in the form of an issue of their shares. The rate would need to be determined, but it would be a significant percentage: BT has to make pension contributions equivalent to 20% of its market capitalisation over the next 4 years. A tax rate of 5% of capital might therefore be required. The shares in question would be issued to a national pension fund. That fund would have obligation to manage those investments to make a return to pay pensions for all people in the UK, not just the employees of the companies that are taxed.
The benefits of the tax are obvious: it does not reduce the cash capacity of the companies that make it to invest in the future as do current pension contributions; it cuts out the current â€šÃ„Ã²middle man’ in the form of the City that currently extracts an undue percentage from all pension contributions made, and it is applied across the board.
These are radical alternatives, I know. But surely that’s better than just giving up and saying, as KPMG does, “tough luck for your old age”. Doesn’t that suggest either a poverty of thinking or callous indifference on their part? Since I’d prefer it wasn’t the second I’ll go for the former.