Stephen Soper, the interim chief executive of the Pensions Regulator, has noticed that bankrupting a company to make its pension scheme solvent is not a terribly good idea. He’s come up with new guidelines which take account of the need to keep a business in business if it is to have any chance of paying pensions to its employees.
This simple truth had eluded the original designers of the legislation, so we should rejoice at a sinner that repenteth. However, Mr Soper’s guidelines are pretty cold comfort. If a scheme is in serious deficit, as so many are, the employer and the pension trustees must “work together to manage and balance the risks to their business and the scheme.”
Having worked together, the trustees must assess any planned investment before allowing inadequate pension contributions from the company. To help them, the regulator promises to develop a “balanced funding objective” which takes account of the finances of the business and the risk in the scheme.
Best of luck with that. All investment involves risk, and assessing it is what the executives are paid to do. The trustees are not, and are in no position to judge the proposals. The balanced funding objective is unlikely to be much help, and could make matters worse: if the balance means less investment and more poured into the pension scheme, the likelihood of it all ending in tears is increased. At best, these new guidelines are more boxes for baffled trustees to tick. At worst, they could lead to the opposite result to that intended.
This won’t be Mr Soper’s problem for much longer. His employer is advertising for a CEO to “oversee £2tn of retirement liabilities” at the Pensions Regulator. Among the usual superhuman talents that the successful candidate must possess should be an ability to remember why company pension schemes have become millstones for so many businesses.
During the good times, extra obligations were heaped onto the schemes, almost casually, by successive governments. Then long-term interest rates collapsed, pushing up the present value of the future liabilities. However, this process can work in reverse, and the price of so-called risk-free assets can go down as well as up. Government stocks, which are the actuaries’ benchmark, have had a miserable seven months. Treasury 5 per cent 2025s, for example, have fallen 11 per cent, pushing up the yield by a full percentage point.
We are not quite yet in a bear market for gilts, but the ingredients are there, and the yield on this (typical) stock is still only just over 3 per cent. Bad news for holders, but good news for Mr Soper’s successor. As the current value of those future pension liabilities falls with rising bond yields, so the number of pension funds in his sick bay will fall. Get those job applications in now.
Quote of the week
“A fee structure for the provision of independent advice that heavily incentivises one outcome over others strikes me as inherently problematic.”
That’s Andrew Tyrie, taking a swing at the money tree that is investment banking. The chairman of the Treasury Select Committee delivered this unpalatable truth this week after hearing another set of bankers explain how inherently reasonable and objective they were in advising their clients over possible acquisitions.
Having observed Richard Cormack of Goldman Sachs boasting about the fine job they did in pricing the sale of the Royal Mail a couple of weeks ago, Mr Tyrie was probably expecting something similar from Tim Wise of JP Morgan regarding the Co-operative Bank’s ill-starred takeover of Britannia Building Society. If so, he wasn’t disappointed. Mr Wise told the committee that he had “complete confidence in my own integrity and impartiality of advice.”
Mr Wise’s employer stood to gain a £5m success fee if the deal went through, and it would be jolly unfair on him if a thick slice of it didn’t stick to his year-end bonus. Well, he’d think it unfair, at any rate. The beauty of investment banking is that making a deal work is someone else’s problem.
As Tom Lehrer so elegantly put it:
“Once the rockets are up, who cares where they come down
That’s not my department, says Vernher Von Braun.”
This is my FT column from Saturday