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Robbing the pensioners – again

19 September 2016

You’ve probably seen in the newspapers various calls for the law to be changed to enable companies to renege on promises to current and pensioners in defined benefit schemes. The idea is that when companies get into difficulties they should be allowed to do a Maxwell and help themselves to the pensioners’ money. It’s disguised to some degree, but your reaction should be the same as to the disgraced publisher. Come to think of it, Gordon Brown’s reputation never really recovered from taxing pension funds’ dividends. But there is a need to scotch this one right now.

The House of Commons Work and Pensions Committee is holding an enquiry on Pension Protection Fund and the Pensions Regulator and has invited submissions on this subject to be received by 23 September. So no time to lose. Here is the substance of what I’ve sent in, urging the Committee strongly to resist any changes that would permit companies unilaterally to avoid obligations under DB schemes.

  1. It is unnecessary to rehearse in detail the background to the current enquiry. Suffice it to say that recent Government and Bank of England policies such as QE have resulted in a financial environment of ultra low interest rates. Despite little if any evidence that these policies are having any of the hoped-for benefits of stimulating growth, they have resulted in artificially inflating the values of equities and real estate, and artificially depressing the yields on debt instruments. The government nevertheless appears set on continuing this policy. This has penalised elderly savers and pension funds who have pursued prudent long term protection with a higher percentage of bonds and cash than those in employment or active trade. Companies which sponsor DB schemes therefore face a requirement to increase their contributions to maintain the schemes.
  2. Some DB funds are sponsored by companies which themselves face financial difficulties. Astonishingly it is being suggested in the media that they can alleviate these difficulties by altering the terms of their obligations to existing pensioners. Those companies and their shareholders are of course those who have most benefited from the artificially low interest rate environment.
  3. Most of these suggestions surround the idea of replacing an RPI uplift obligation with one linked to CPI. This trades off the cognitive error that pensioners may make in failing to understand the precise cost of that. But just because the numbers are variable and uncertain does not change the fact that this is a transfer of wealth from the pensioners to the company (indeed the benefit shown in the companies’ accounts of a reduction in the estimated liability is of course precisely the estimated appropriation from the pensioners). The uncertainty of a future calculation does not alter the fact that such a change would be retrospective, in breach of fundamental constitutional principles.
  4. Without a change in the law this appropriation is illegal. With a change, it may still be; as it would appear to engage issues under Article 1 of Protocol 1 of the European Convention on Human Rights. This is because the imposition even by law of such a penalty on the pensioners can only escape A1/P1 if it is in the “general interest”: it is hard to see why the benefit of the company’s shareholders is a more general interest than those of the pensioners. No doubt this can be argued either way; but expect challenges to be made.
  5. But even if the law could be amended to permit such a change, how could it possibly be seen as fair to do so?
  6. There are many good reasons of public policy why pensioners should enjoy greater protection than shareholders. (The Committee will hardly need to be reminded of the special public outrage associated with theft from pension funds.) Pensioners are retired, have based decisions on reasonable expectations and are unable to take action to remedy their finances, while active companies can (indeed that is what Government policies are supposed to achieve).
  7. There is a particular irony here for those of us (I am one) who held with-profits policies in Equitable Life. That company promised uplifts in a different class of product it had also sold which it turned out it could not afford. The with-profits policyholders were effectively in the shoes of the shareholders, and would have benefited had the courts decided to release Equitable Life from the obligations. This did not happen. Nor were we bailed out by the tax-payer or compensated for the failings of the regulators for allowing the problem to grow. Instead we lost money. Now we are on the other side with legitimate expectations from our DB pensions which are also threatened.
  8. This is not to deny that there are issues for sponsors of DB funds. But there are I believe quite different responses to be pursued.
  9. Firstly the Government and Bank of England should recognise that this damage is their doing, and that the policies should now be reversed.
  10. Secondly we should ask whether companies should ever be allowed to sponsor pension schemes. For the reasons set out above, the risks to the pensioners from company default are too high, and I would argue that pension obligations should be underwritten by government or at least divorced from sponsoring companies.
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