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.