Dear Kodak Pensioner: we can’t pay your benefits this month, but here’s a big box full of assorted camera films for you to swap for something to eat. Well, perhaps not. Kodak’s bankruptcy last year was a shocking demonstration of how a disruptive technology can destroy big, well-established businesses if they don’t see it coming, but the failure has at least forced its executives to show some brain activity.

Kodak has sold its legacy film manufacturer to its British pension fund. Instead of a financial claim on a bankrupt company, the fund will own a business. While it may not be a very exciting business, the chairman of the fund believes there is “a very high chance” of sufficient cash flow to keep up the payments to pensioners. Presumably, he hopes they will fade away faster than the business itself.

Whether he’s right or not, it’s a better solution than the last resort of the Pension Protection Fund, which offers only basic benefits for failed schemes, as thousands of UK Coal pensioners are about to discover to their cost. In addition to retaining control, the Kodak trustees will be employing their assets productively. Instead of supplicants, they will be shareholders.

This defies the conventional wisdom on pension schemes, where the baleful combination of legislation and actuarial mumbo-jumbo has driven trustees to sell shares and buy “risk-free” government bonds. Rising bond prices equal falling yields, which means lower discount rates for actuarial calculations of future liabilities. This bumps up the present value of those liabilities, forcing companies to buy still more bonds..

While there is some logic to this for an individual scheme, the schemes as a whole can only meet their liabilities if the capital is employed productively, something governments generally struggle to do. Under the current rules, cash drains from companies to meet the demands of their own schemes, which in turn dare not make the riskier, long-term investments which produce future growth.

A few companies have broken out of this vicious circle. Diageo poured £500 million of whisky stocks into its fund, while Dairy Crest used 20,000 tonnes of cheese to plug its deficit. Generally, though, it takes a corporate crisis to force some imaginative thinking about paying for pension liabilities, as Kodak’s snappy solution demonstrates.

Iain’s winter warmer

Iain Duncan Smith would like those of us oldies who can afford it to get a warm glow from our winter fuel allowance by giving it up. He’s even pointed out how to do it. Well, every little helps when it comes to government spending, but this is desperation, not sensible policymaking. We recycle much of the money anyway; whisky drinkers who prefer their central heating internal pay about £140 of the £200 allowance straight back in duty and VAT.

The allowance is the legacy of a particularly cynical piece of Brownian crowd-pleasing, along with free TV licences for the even olders, and now the pleasant surprise has faded, we’ve come to expect it every year. Even Ed Milliband has noticed, and dared to suggest that it might not be sacrosanct. Still, those who don’t need it should think twice about helping the government kick its £2 billion-a-day spending habit. Better to give £200 to charity, which will spend the money much more efficiently, while you claim tax relief on the donation. That’ll teach ’em.

Keeping the lights on

“When the energy crisis hits there will be three possible casualties, the government of the day, the consumer, and the investors who have funded the UK government’s radical energy policy. Whilst no doubt there will be plenty of pain to go around, investors should be under no illusions that the government will seek to protect itself and the consumer (aka the electorate) by heaping most of the financial pain on to investors.”
Thus brokers Liberium Capital in another scary assessment of the slow-motion train crash that is UK energy policy. As they point out, the managements at Centrica (British Gas) and SSE have already noticed, and are scaling back investment. Along with Drax (importing wood-chip from America to look green) the brokers reckon the risk in these utilities is growing and urge investors to “limit exposure”. That’s “sell” in English.
This is an updated version of my column from Saturday’s FT
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