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| Version 1 | Version 2 |
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| Dark shadow cast by Britain's deficit-riddled pension funds | Dark shadow cast by Britain's deficit-riddled pension funds |
| (4 months later) | |
| The pension rescue fund is creaking under the weight of final-salary schemes whose sponsoring companies can no longer support them | |
| Sat 14 Oct 2017 18.48 BST | |
| First published on Sat 14 Oct 2017 17.00 BST | |
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| Pensions are the tail wagging the economic dog – sometimes in the strangest ways. Take the high-profile collapse at Monarch Airlines. It’s a sorry story of corporate raiders facing accusations of asset-stripping one of the country’s largest holiday airline businesses and leaving taxpayers to pick up the tab. The once strong, if slightly dated, brand was taken over by private equity financiers to try to make it into another Ryanair. | Pensions are the tail wagging the economic dog – sometimes in the strangest ways. Take the high-profile collapse at Monarch Airlines. It’s a sorry story of corporate raiders facing accusations of asset-stripping one of the country’s largest holiday airline businesses and leaving taxpayers to pick up the tab. The once strong, if slightly dated, brand was taken over by private equity financiers to try to make it into another Ryanair. |
| When that failed, it appears the owners could still walk away with a profit, following a sophisticated offloading of the debts, including the ailing pension fund – once a major creditor to the business. The fund, which is in the Pension Protection Fund (PPF), may have been left short when it first collapsed in 2014. | When that failed, it appears the owners could still walk away with a profit, following a sophisticated offloading of the debts, including the ailing pension fund – once a major creditor to the business. The fund, which is in the Pension Protection Fund (PPF), may have been left short when it first collapsed in 2014. |
| The Labour MP Frank Field, the indomitable head of the work and pensions select committee, has called for an investigation. His judgment is finely tuned after his battle with Sir Philip Green and the businessman Dominic Chappell, who bought BHS from Green before its collapse. | The Labour MP Frank Field, the indomitable head of the work and pensions select committee, has called for an investigation. His judgment is finely tuned after his battle with Sir Philip Green and the businessman Dominic Chappell, who bought BHS from Green before its collapse. |
| Years of asset-stripping had left BHS with its shelves stacked high with clothes no one wanted to wear, and ditching the pension fund was one of the main methods of saving cash from the wreckage. For its part, Monarch’s owner, Greybull Capital, said it had been talking to the PPF since 2014 and had not taken out loan repayments, dividends or interest in the past three years. Furthermore, Greybull said it expected a £7.5m loan note from Monarch to the PPF to be repaid in full. | Years of asset-stripping had left BHS with its shelves stacked high with clothes no one wanted to wear, and ditching the pension fund was one of the main methods of saving cash from the wreckage. For its part, Monarch’s owner, Greybull Capital, said it had been talking to the PPF since 2014 and had not taken out loan repayments, dividends or interest in the past three years. Furthermore, Greybull said it expected a £7.5m loan note from Monarch to the PPF to be repaid in full. |
| But the PPF is creaking under the weight of final-salary schemes that have discovered their sponsoring companies can, for whatever reason, no longer support them. Today UK final-salary pension schemes have £1.6tn of liabilities and a £224bn deficit. Worryingly, the deficits of the worst-affected schemes are only getting into deeper trouble. | But the PPF is creaking under the weight of final-salary schemes that have discovered their sponsoring companies can, for whatever reason, no longer support them. Today UK final-salary pension schemes have £1.6tn of liabilities and a £224bn deficit. Worryingly, the deficits of the worst-affected schemes are only getting into deeper trouble. |
| So what could be better than to find a way to offload a debilitating pensions deficit into a fund that was set up by the government, that is ostensibly independent and funded by the remaining “good” employers, but will most likely fall into the taxpayer’s lap some time in the future, limiting complaints from retirees? | So what could be better than to find a way to offload a debilitating pensions deficit into a fund that was set up by the government, that is ostensibly independent and funded by the remaining “good” employers, but will most likely fall into the taxpayer’s lap some time in the future, limiting complaints from retirees? |
| In the world of unintended consequences, another problem is that companies freed from their pension deficit are more attractive to corporate financiers looking to merge or take over firms with their spare cash. It could be argued that one of the chief defence mechanisms against corporate raiders over the past 15 years, in the absence of any protection from government, has been the deterrent effect of pension deficits. | In the world of unintended consequences, another problem is that companies freed from their pension deficit are more attractive to corporate financiers looking to merge or take over firms with their spare cash. It could be argued that one of the chief defence mechanisms against corporate raiders over the past 15 years, in the absence of any protection from government, has been the deterrent effect of pension deficits. |
| Why would a buyer want a juicy business when to bite into its balance sheet is to hit the sour taste of its heavily indebted retirement fund? That has almost certainly been a key factor in keeping British Telecom, Unilever and Marks & Spencer from being snapped up by a foreign rival. Likewise all our best engineering firms, most of them founded 50 or 60 years ago and with big fat pension deficits, have been safeguarded by their whopping pension liabilities. | Why would a buyer want a juicy business when to bite into its balance sheet is to hit the sour taste of its heavily indebted retirement fund? That has almost certainly been a key factor in keeping British Telecom, Unilever and Marks & Spencer from being snapped up by a foreign rival. Likewise all our best engineering firms, most of them founded 50 or 60 years ago and with big fat pension deficits, have been safeguarded by their whopping pension liabilities. |
| But this is an isolated example of the good that a pension fund does for the long-term health of the economy. For example, most strikes since the crash of 2008 have not been about the failure of employers to pay a decent wage or the shift to a casualised workforce, as exemplified by the rise of zero-hours contracts. Most have been organised by shop stewards in their 50s and an ageing, unionised workforce in an effort to save their pensions. | But this is an isolated example of the good that a pension fund does for the long-term health of the economy. For example, most strikes since the crash of 2008 have not been about the failure of employers to pay a decent wage or the shift to a casualised workforce, as exemplified by the rise of zero-hours contracts. Most have been organised by shop stewards in their 50s and an ageing, unionised workforce in an effort to save their pensions. |
| Never mind that the entitlements awarded more than 40 or 50 years ago and gold-plated by a naive Major government in the 1995 Pensions Act are unaffordably generous. | Never mind that the entitlements awarded more than 40 or 50 years ago and gold-plated by a naive Major government in the 1995 Pensions Act are unaffordably generous. |
| The Communication Workers Union said that its planned strike action at Royal Mail “was sparked by the company’s attack on the pension rights of hard-working postmen and women” before going on to say it was also about pay, working hours, job security and “growing the service”. | The Communication Workers Union said that its planned strike action at Royal Mail “was sparked by the company’s attack on the pension rights of hard-working postmen and women” before going on to say it was also about pay, working hours, job security and “growing the service”. |
| It’s easy to sympathise with Royal Mail workers when their business has been asset-stripped by the government for decades before privatisation, and managers have feathered their nests before asking the shop floor for sacrifices. But huge amounts of energy are being spent by both sides fighting over pensions when they could have been saving the postal service. | It’s easy to sympathise with Royal Mail workers when their business has been asset-stripped by the government for decades before privatisation, and managers have feathered their nests before asking the shop floor for sacrifices. But huge amounts of energy are being spent by both sides fighting over pensions when they could have been saving the postal service. |
| The pension fund gap also provides an answer, at least in part, to the productivity puzzle and why companies have invested so little in equipment and processes since 2008. | The pension fund gap also provides an answer, at least in part, to the productivity puzzle and why companies have invested so little in equipment and processes since 2008. |
| Another reason for the lack of investment is the demand from shareholders to fill their boots. And who are the shareholders? Yes, it’s those deficit-riddled pension funds that have increasingly forced companies to pay monster dividends or fund huge share buybacks before they even think about funding new equipment so UK workers can compete with the best in the world. | Another reason for the lack of investment is the demand from shareholders to fill their boots. And who are the shareholders? Yes, it’s those deficit-riddled pension funds that have increasingly forced companies to pay monster dividends or fund huge share buybacks before they even think about funding new equipment so UK workers can compete with the best in the world. |
| It’s true that UK pension funds have in recent years diverted away from the London stock market in favour of foreign stock and bond markets. However, they remain a force, and one that promotes short-termism over long-term investment. | It’s true that UK pension funds have in recent years diverted away from the London stock market in favour of foreign stock and bond markets. However, they remain a force, and one that promotes short-termism over long-term investment. |
| The conclusion must be that Britain’s occupational pensions should all be tipped into the PPF in exchange for some state protection from foreign takeovers. Then business leaders might usefully deploy some of their revenues for investment and not just to fill baby boomers’ retirement funds. | The conclusion must be that Britain’s occupational pensions should all be tipped into the PPF in exchange for some state protection from foreign takeovers. Then business leaders might usefully deploy some of their revenues for investment and not just to fill baby boomers’ retirement funds. |
| This article was amended on 18 October 2017 to change a headline and remove a reference to the Pension Protection Fund being “state-sponsored”. | This article was amended on 18 October 2017 to change a headline and remove a reference to the Pension Protection Fund being “state-sponsored”. |
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| The Observer | |
| Monarch Airlines | |
| Insurance industry | |
| Pensions | |
| Economics | |
| Pensions Industry | |
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