Seems like a reasonable demand

And third, pension funds must have their own version of a living will. If banks need these then so too do pension funds. The possibility of being dependent upon bailout should be seen as the absolute last resort: the obligation of the company to meet its liabilities as they fall due should be paramount, and if it cannot be met then a charge over the equity in issue of the company that has promoted the scheme should be put in place: no shareholder of that concern should be able to extract value until the obligation to the members has been met.

One that’s largely already met tho’ isn’t it?

19 comments on “Seems like a reasonable demand

  1. So it turns out that writing about applying concepts relevant only to defined contribution pensions (eg investment preferences) in the context of defined benefit pensions produces complete gibberish. Who knew?!

  2. Reasonable! Depends on your standpoint. For example, the BT defined contribution scheme was closed to new entrants around 2001 and has liabilities profiled out to around 2078. It currently has a funding deficit of around £6bn. It pays out dividends of £1.5bn. Should BT be forced to make good the deficit before it pays dividends, considering the ultra long term nature of the pension liabilities and the fact that investment returns are continually being screwed by geniuses like Mark Carnage? If bond rates were to increase then to whom would the scheme surplus belong?

  3. @ Diogenes
    There already is a charge over the equity in respect of the £6.4bn deficit in the BT Pension Scheme. It is shown as a Liability on the Group Balance Sheet and dividends cannot be paid unless there is surplus that is large enough to cover both that liability and the proposed dividend [OK, deficit in BT Italia is side-stepped by saying that the parent company has a limited liability for BT Italia but that isn’t the point].

    The directors of any UK company that tries to pay dividends to enrich shareholders at the expense of the Pension Scheme (or other creditors) are eligible for jail sentences under basic rules of company law.

  4. John77 do you mean this reference in note 20 to the latest accounts?

    “BT will provide additional payments to the BTPS by the amount that shareholder distributions exceed a threshold.
    The threshold allows for 10% per year dividend per share growth plus £200m per year of share buybacks on a
    cumulative basis”

    It hardly amounts to a charge

  5. @ Diogenes.
    NO.
    The Pension Fund Deficit is listed as a Liability on the Balance Sheet. Equity = Assets minus Liabilities minus Provisions for Liabilities (minus Preference Shares, if any). Dividends may only be paid out of retained earnings. The figure for retained earnings each year is *after* deducting any increase in Pension Fund Liabilities.
    Therefore BT cannot pay a dividend unless it has accrued undistributed profits and surplus assets that more than cover the amount that it owes to the Pension Fund.
    BT could just pay £6bn to the Pension Fund by borrowing money from banks or stock exchange investors but that would be financially inefficient and would be wasted if the BoE raised interest rates to a sane level as the current value of the liabilities would shrink by more than the value of the Fund’s assets (and it is very difficult to get surplus money back from a Pension Fund)

  6. Now, it’s been a while since I worked in pensions, so forgive me if I get some of the
    details wrong, but from what I recall a big part of the problem is that Labour (Gordon Brown iirc) passed a law preventing companies from over-funding their pension schemes.

    The idea was to stop excess profits being put into the pension fund on the good years (avoiding the need to pay tax) and contributions then skipped in the leaner years (making the bottom line look better – this effectively allowed profits to be shifted from one fiscal year to another, but I never really saw why that was a problem).

    So, a new valuation system was established that determined how much money was required to meet the outstanding liabilities on an ongoing basis, and you couldn’t fund your scheme significantly above this level (or maybe you could, but would have to pay additional charges that make it pointless, not 100% sure how it works).

    The big problem then arises when one of two things happens:

    (i) if the sponsoring company goes bust, the scheme only has enough money to pay benefits on an ongoing basis, not on a buyout basis (buying the benefits in a guaranteed way is more costly than providing them from your own assets), so just about all schemes are underfunded if the parent company goes bust. And note, you’re explicitly not allowed to fund the scheme to the level where it can buy out members benefits if the company goes bust.

    (ii) if something happens to affect the balance of assets vs liabilities (such as QE) then the scheme can very quickly swing from 100%funded to significantly underfunded. In this case, the pressure can cause big issues for the parent company (such as with BA).

    So long story short, just about all pension schemes are underfunded and will need bailing out if anything happens to their parent company, because of a rule put in place by Labour.

  7. @johb77. So you admit there is no charge, in any meaningful sense.

    Your views on distributable profits need updating, by the way, I have received dividends from listed companies without retained earnings. The notion of distributable earnings should go on to your continual education list. I accept that you won’t admit error. It means nothing to me.

  8. @ Rational Anarchist
    Pretty close – the law didn’t ban overfunding directly: it just took away their tax exemption if if was more than 110% funded so Funds had a very thin (if any) cushion when the stock market bubble burst in late-2000 (a balanced portfolio lost 40% between Nov 2000 and March 2003).
    So, yes all schemes were massively underfunded (typically assets were only two-thirds of liabilities prior to emergency funding by sponsoring companies by 2003) as a direct result of Brown’s meddling.
    Footnote – the Pension Fund’s income would be cut by 30% if it lost its tax-exempt status which would of course create a massive need for extra funding for the foreseeable future, more or less wiping out the sponsor’s ability to pay dividends.

  9. @ Diogenes
    The retained earnings only have to be in the company paying the dividend so if they are indulging in fancy accounting they can pay dividends from the holding company when the consolidated group accounts show a deficit on retained earnings.
    There continues to be a trickle of listed companies applying to the Court to cancel the Share Premium Reserve in order to create distributable reserves to allow them to legally pay dividends.
    I do admit error when I am wrong and I was clearly wrong to give you a simplified version of the rule.
    The charge is as meaningful as any long-dated debenture as the Pension Fund is a creditor (and usually a preferred creditor) so if the directors distribute money to shareholders in a way or to an extent that they cannot pay the Pension Fund they are in breach of company law and can go to jail.
    This isn’t a question of accounting standards but of company law.

  10. Interesting to note that Murphy has now deleted many posts on his threads, to remove the ones where he is making false claims e.g. about convexity having been debunked etc

    He really is a c*nt.

  11. And let’s not forget that John77 ignores the way that potential fund surpluses impact on the situation.. The situation that led led Lawson to crack down on pension funds, but not Mirror

  12. Wasn’t there something in the original privatisation of BT where the government kept a golden share and some of the pension liabilities? I think the golden share has gone but not sure about the pension liabilities.

  13. @ BiND
    Yes, but a guarantee not a liability. If BT is would up and its pension fund cannot HMG will pay the pensions of those pensioners who were employed by BT wjile it was in the public sector. A further case of conflict of interest between BT shareholders and pensioners.

  14. The obligations under company law to pay dividends only out of “distributable surplus” and not to “act to the detriment of creditors” are *not* affected by a surplus in the pension fund which will be shown as a non-current asset on the balance sheet.

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