By Graham Street

In 2016 British Home Stores went into liquidation. Not only were its staff, in Hastings as elsewhere, unemployed but it also transpired there was a massive hole in the company pension fund. Ultimately the Pension Protection Fund (PPF) stepped in, but former employees only received 90% of the pension they had paid and planned for.

BHS isn’t the only Hastings employer with a pension fund black hole. Tesco has a £6.6bn pension deficit while BT’s stands at £14bn. The PPF says two thirds of UK pension schemes are in deficit. Following Carillion’s recent collapse, the company claimed its total pension liabilities were £650m but later revealed them to be closer to £2.6bn. It won’t be the last company to leave its pensions to be bailed out by the PPF. As Steven Webb, former Pensions Minister said: “The question isn’t if there will be another Carillion – it’s when.”

PRIORITISING DIVIDEND PAYMENTS
The pension crisis is often blamed on people living longer, but the root cause is employers prioritising dividend payments, over pension fund contributions. According to global financial services company Jardine Lloyd Thompson, FTSE 100 companies paid dividends of £71.2bn in 2017, despite having a combined pension deficit of £43bn.

Steven Webb argues that when firms are doing well, they should plug holes in their pension funds. Instead, companies tend to increase their profits by reducing their employees’ pensions. Bosses have been largely unchallenged, because pension gaps are subject to erratic change from year to year. These are exploited, to justify shifting risk from their shareholders to employees, while transferring wealth from the employees, to shareholders.

Pension gaps occur with schemes that promise a certain pension, e.g. half the final salary. Estimating the eventual cost is difficult because of the length of the pension contract from hiring to death. This calculation is done annually but measuring the liability (estimated final cost of pension) and assets (investments to cover pension costs) is problematic, as both are subject to market swings.

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Estimates of the investment needed to cover liability fluctuates wildly. For example, BT used the rate of 3.84% in 2009 but by the following year it was 1.83%. To pay a pensioner £10,000 after 60 years, would have required £1,043 in 2009. But by the next year it required £3,369. Thus BT’s pension liability went from £33bn to £43bn in one year.

VOLATILE MARKET VALUES
Furthermore, the assets held in pension funds to meet liabilities are recorded at notoriously volatile current market values. In ten months, from December 2007 the average value of the biggest London Stock Exchange companies fell by 38%.

In the following 18 months it rose by 38%. Therefore market prices simply don’t reflect the long term returns they will yield, to fulfil pension promises.

This margin of error tends to be exploited by employers. Many pretended the 1990s bull market would continue and claimed there were sufficient assets to cover the liabilities, making it unnecessary to keep contributing to pension funds. These contribution ‘holidays’ added £18bn to companies’ profits, but when the markets turned, pension fund assets fell by a quarter. Fund shortfalls resulting from contribution holidays are used by employers to abandon or dilute defined benefit schemes. In recent years most employers have frozen such schemes and excluded new employees. Instead they have moved to defined contribution schemes, which give no guarantee of retirement income. Paul Lewis in the FT estimated that, as a result, typical employers’ pension contributions have fallen from 15% of salary costs to less than 7%.

WORKERS PAY THE PRICE
Taking contribution holidays has profited employers, when pension fund estimates have been optimistic. When they’re pessimistic, it’s the workers who pay the price, with benefit reductions. For companies it’s heads we win, tails, you lose.

Successive governments have done little or nothing to address the situation. In March 2018 the government demonstrated its lack of concern with a DWP policy paper that called for a stronger Pensions Regulator and totally ineffectual fines of £5000 for individuals and £50,000 for corporations that contravened regulations. Rebecca Long-Bailey MP, Labour’s Shadow Business Secretary, gave the vague response: ‘The next Labour government will go further and implement tight corporate governance rules to ensure that big corporations do not dodge their responsibilities towards their pensions schemes.’

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https://www.hastingsindependentpress.co.uk/wp-content/uploads/2017/05/politics.jpghttps://www.hastingsindependentpress.co.uk/wp-content/uploads/2017/05/politics.jpgHIPPoliticsBy Graham Street In 2016 British Home Stores went into liquidation. Not only were its staff, in Hastings as elsewhere, unemployed but it also transpired there was a massive hole in the company pension fund. Ultimately the Pension Protection Fund (PPF) stepped in, but former employees only received 90%...The Hastings & St Leonards non-profit community newspaper