Let companies take a break from funding their pension schemes

“Occupational pension scheme” – it’s about as boring as a phrase can get. But in today’s Britain, it is one that sums up a huge part of the divide between the haves and have-nots.

Look at the latest data on pensioner income from the Department for Work and Pensions. Back in 1994-95 the average (median) income of a UK pensioner was 38% below that of the average member of the working-age population. It is now 7% below. That’s partly down to the “triple lock” for state pensions which sees the state pension rise each year by the highest of consumer price inflation, average earnings or 2.5%, and partly down to more pensioners having some sort of private income.

Look at the report closely and you will also find that it is about defined benefit pension schemes. Pensioners over 75 are much poorer than those under 75: the former have £257 a week to live on, and the latter £348. Obviously, more of the under-75s are likely still to be working, at least part-time. But, the report says, the key is that “younger pensioners are more likely to have benefited from the peak of occupational scheme savings in the 1960s”.

Average income from those occupational pensions has increased by more than one-quarter in the last decade. These younger pensioners, it seems, are part of a genuinely lucky generation: they worked through good years for the UK economy, building up what now look like extraordinary pension benefits (annual inflation-linked payouts at a percentage of their final salary – forever).

They aren’t the last, either: defined benefit schemes in the private sector may be mostly closed to new entrants but an awful lot of people coming up to retirement in the next 20 years will still have them. I have been looking at City contemporaries a mere five years older than me with more than mild envy for some years now. I would need to save millions to have even the slightest chance of mirroring their financial future.

But their financial security might be coming at a cost to the rest of us that goes way beyond mere envy. Hymans Robertson, pension consultants, released calculations this week that showed UK pension deficits (the extent to which the value of their promises to workers and pensions exceeds their assets) at yet another new high: they are £937bn short.

You can obviously blame part of this on rising longevity. Who could possibly have known when they were setting up a scheme 50 years ago that people would soon have the nerve not to die in their late 60s?

But the core problem here is less about longevity than gilt yields. Pension fund trustees make assumptions about future returns based not on average past returns or on a likely return from a diversified portfolio but from current gilt yields. So the more these fall, as they have again since the EU referendum, the worse the position of the pension funds looks.

The obvious answer to this is for the companies that have schemes to put more money into them. After all, on the face of it, it isn’t that there’s a shortage of cash knocking around some of the UK’s big companies. A few weeks ago stockbroking firm AJ Bell produced analysis that showed that 35 of the FTSE’s top 100 companies pay out more in dividends than they have in liabilities to their pension funds.

Some examples: Shell paid out £7.53bn in 2014. It has liabilities estimated at £6.74bn. The numbers for AstraZeneca are £2.17bn and £1.87bn. For National Grid they are £1.6bn and £1.28bn. You get the picture. Unfortunately this isn’t as simple as it looks. The first thing to note is that cutting dividend payments for deficits might be good for some pensioners — but it would be horrible for others. Those saving for the future in defined contribution schemes would miss out on the compounding effect of reinvested dividends and those already in drawdown would find themselves suddenly short of income.

The second is that not all companies have the kind of cover as those mentioned by AJ Bell. If they have to keep putting money into their pension deficits they do so at the expense of their other stakeholders. Pension schemes in deficit mean capping the salary rises of current employees (usually not in the pension scheme) to free up cash for the pensions of past employees (who usually are). And they mean holding back on the capital investment required for the long-term health of the company to get cash into the pension fund instead. Not good.

The dilemma here is a reminder that our corporate sector has responsibilities to all manner of different groups: their pensioners, yes, but also their shareholders, who include other company’s pensioners. And, of course, society as a whole.

You’ll think that sounds a little airy fairy coming from me. But I mean it. Look to the comments made this week by pension minister Ros Altmann: there is, she said, a “delicate balancing act” on the go. Yes, we want strong pension funds, but not at the expense of the growth we also really need. If the heavy levels of contributions to pay pension fund deficits are one of the factors capping wages and investment, and hence perhaps hampering productivity, are we doing the right thing by insisting that companies keep pouring cash into them? I suspect we are not.

So what do we do instead? When I spoke to Altmann about this a few weeks ago, she was maddened by the lack of flexible thinking among pension trustees. They are allowed to use higher estimates of their total future returns than those suggested by gilt yields, she says. If they did, their deficits would suddenly look a lot lower, as would the contributions required to close those deficits. They just won’t (they are a naturally overcautious lot).

She is looking for new ways to legislate them into doing this. But given that we all agree that the UK needs to pull itself together in terms of long-term investment and productivity, I wonder if there isn’t a better immediate solution.

In the 1990s trustees allowed big companies to take holidays from paying into their pension funds on the basis that projected future returns suggested they already had far too much money in them (whoops). Those projections were completely wrong.

Perhaps, given the circumstances, now might be a time to give those same pension funds another few years of contribution holidays on the opposite basis: projections suggest that they have too little money in them, too little by such a multiple that filling the void is playing a nasty part in wrecking the long term futures of our corporate sector — and killing our economy.

Something has to give here – and of course if the projections of future returns turn out to be as wrong now as they were in the 1990s it’s all going to look a little silly anyway. Politicians have a fabulous opportunity to push through change and to blame it on Brexit (in this case because our vote has pushed down gilt yields). They should take it. Time for a holiday?

• This article was first published in the Financial Times


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