As I’ve been saying

The BHS pension thing isn’t really about Green and the dividends at all:

Mark Carney has just made Sir Philip Green’s life even more difficult. The retail tycoon’s bid to bail out the BHS pension scheme, and hold on to his knighthood, could have soared to more than £700m after the Bank of England governor presided over a cut in interest rates last week.

Adding to the pressure, the Bank also pumped more cash into the UK economy in a move that hit gilt yields – the return on government debt.

The cut in borrowing costs to 0.25%, combined with a new round of quantitative easing, sent gilt yields crashing to a new low. This could add another 7% to pension scheme deficits, according to consultancy Hymans Robertson, which would add nearly £50m to the BHS bill.
A plunge in the value of gilt yields after the EU referendum contributed to a near-19% rise in the average value of pension deficits controlled by the PPF between February and June. That suggests a rise of about £100m for the BHS scheme’s maximum deficit, taking it to £670m. Last week’s action by the Bank of England has sent it soaring again.

The dividends came out up to 2004 or so, In 2006 the scheme was in minor (£30 million or so) deficit. It’s the change in investment returns since then which have killed that pension scheme.

And no, there’s not that much in law to state that Green is liable for it either.

19 thoughts on “As I’ve been saying”

  1. Surely there must be some figures as to the actual assets in the fund at 2004, vs the actual assets in the fund now? If there’s more money in the kitty today than 10+ years ago then you can’t really blame Philip Green can you, if the macro-economic investment situation has changed?

  2. It’s not just about assets in the pension fund. There are almost certainly more of them than there were several years ago as markets have gone up (perhaps not if there is a very high proportion of existing pensioners drawing pensions).

    What matters in the funding of DB pension funds is the asset-liability balance. And it’s the liabilities that have outpaced the assets.

    Simply put, lower interest rates boost the current value of the future liabilities (crudely because you need to save more now to pay a given income in future).

    But here lies the rub – it’s not actually the level of current interest rates that really matters. It’s the expected value of interest rates between now and the future. This is done with an ‘actuarial estimation’ of an appropriate ‘discount [interest] rate’ . Which is a bit of an educated guess, in truth. And very subject to the whims of the supposedly-independent pension trustees.

    On reality, these estimations tend simply to lag big structural changes such as those we’ve seen in the last few years. It takes time to realise we really live in a new financial regime.

    So it is possible that the pension plan looked near fully-funded, but we also need to be looking to see if those estimations of future liabilities were actually that realistic or not. And if not, why not.

  3. Jim,

    I posted this on a thread a couple of weeks or so ago (I can’t find it now).

    At 2008, the pension fund appeared to be just in surplus (ie breakeven).

    For more detail for a particular year, the Companies House link below has the details of pension assets versus liabilities (and much moire) in its notes for the respective years.


    The idea that if a company has no reserves it will go bankrupt during the first cyclical downturn and thereby render all its workers unemployed hasn’t crossed his mind.

    John77: May I quote your last paragraph in one of the Bhs threads?

    If it’s helpful, some quick extracts from here:

    Green was appointed May 2000.

    I can’t format columns easily on here, for annual amounts, so some summary numbers:

    At March 2000, the company balance sheet had net operating assets of £328m, pension deficit of -£25m, and S/H funds of £303m.

    From 2000 to 2008, accumulated PAT was £358m, dividends -£414m, other S/H changes (actuarial etc) -£21m, net change of £-77m. Dividends were in the years 2002 to 2004, nothing after that (roughly consistent with press reports?).

    At March 2008, the balance sheet had net operating assets of £224m, pension surplus of £2m, and S/H funds of £226m (to compare with 2000).

    From 2009 to 2014, accumulated PAT was -£298m, dividends £0m, other S/H changes (actuarial etc) -£184m, net change of £-482m.

    At March 2008, the balance sheet had net operating assets of -£145m, pension deficit of -£111m, and S/H funds of -£256m.

    Re John’s comment, the company had a reasonable balance sheet at 2008. It might even have been unusual for the company to build up S/H funds by 2008 of some £640m if no dividends had been paid, especially given that annual turnover was only in the £800-900m range or so through those good years?

  4. I am reminded here of the old joke (which I first heard at PwC) that actuaries are those who would find accountancy too exciting.

  5. “60% of them are similalry in the shit”

    Please dear God, let that include the Guardian’s pension plan.

  6. Second paragraph from the bottom – is August 2014 not March 2008… obviously, 2008 balance plus 2008-14 movements = 2014 balance (with a change of year end).

  7. SJW

    We blame banks if they expose themselves to market risk they haven’t got the assets to cover. Why should companies with large pension funds be different?

    So preumably you agree that Thatcher got it completely wrong, when she restricted C Tax relief on contributions into pension schemes?

    Ie, you, as an SJW, would have said: “No ,they should be allowed C Tax relief on these contributions, and hence build up rainy day surpluses, rather than be forced to take contribution holidays and risk the funds being hugely under sourced as a result of future cycles”…

    btw, if you had, I would have agreed whole heartedly with you..;)

    Not just Thatcher of course, Brown was an even bigger imbecile…

  8. SJW

    I know that you understand balance sheets.

    It wasn’t the payments (to the pension funds) that were tax free on the way in – it was the “charges” (against the company’s profit and loss account) that were tax deductible. Ie, it was a contribution into the pension fund, not a loan,

    If some of that money was then to be later lent back to the company, notice that it would be “lent”. Ie, repayable, with an obligation on the company to have sufficient balance sheet shareholder funds and all that (ie after having deducted earlier charges on contributions to the pension fund).

    As long as the loan is interest bearing and on similar terms / security to that say that a bank would lend (trustees have obligations), in theory I don’t see the problem with such an arms length loan.

    If pension funds can’t invest / lend properly, that’s a different issue, maybe rules whereby trustees are on the hook for not being sufficiently independent might be more appropriate? (and I don’t know the current regulations on all that – not my area)…

  9. actuaries are those who would find accountancy too exciting

    Actuary: a man who always wanted to be an accountant, but lacked the personality for it.

  10. The effect of interest rate cuts isn’t all one way traffic – the value of future liabilities is increased, but the value of current gilt holdings has gone up. If you were 100% in gilts, the effect might be quite small. Most funds are big losers though, as Tim points out.

  11. DBC Reed – when we have capitalism in Britain not working.
    Lots of people have been saying its not working for the past several decades.
    They appear in that time to be…. not right.

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