BT move to cut pensions - implications for millions

[XFool]

the pension was very much a case of deferred income

But you could say the same about many job benefits and perks.

For instance I might take a job with a lower salary because there are potentially large bonuses paid out annually, like many City jobs.

Or I might be OK with a lower salary if there are share or option ownership schemes and I expect the company to do well enough to grow in value. Or I might work for less at a private company where I am hoping to cash out with a future IPO. These are typical with Tech employers, for instance.

In each of these cases I am accepting a risk - that the "jam tomorrow" never happens and I worked for less than I was worth. So why is a pension any different from that? Again, I work for less in the hope that that gold-plated pension is still affordable when I retire. But my employer could go broke or its pension fund may perform badly.

Choosing an employer involves more than just assessing the day-to-day work and the salary. It involves an assessment of the future prospects of the enterprise. Those who choose badly will do worse, just like those who buy the wrong shares. Imagine working for Google versus working for Enron, for instance.

I think this is entirely unrealistic. People who have chosen to invest capital in risky shares either know what they are doing or believe they do . Either way they know what they are choosing to do. To compare a 16 YO apprentice 50 years ago starting work in a 'good' secure job with a pension - say the GPO - as equivalent to a high flyer going for a financial job in the city with "bonuses" is, IMO, just ridiculous!

[Alaric]

but as I understand it the company pension scheme is not fully ringfenced from the company finances, money can flow both ways, to the company if the pension fund is doing well, and the reverse is badly, and both have occurred over the last 40 years.

Legally they are fully ring fenced as the company pension scheme is usually set up under Trust law. Back in the 1980s it became commonplace for Companies to take a contribution holiday, whereby they didn't pay into a scheme for several years. HMRC rules about supposed over-funding had an influence as well.

It was also possible to return a surplus
https://www.pinsentmasons.com/PDF/Makin ... Easier.pdf

Accounting rules expect the pension liabilities to be disclosed on the Company's balance sheet. Thus the Company's role as a contributor of last resort or overall guarantor of the scheme is highlighted.

[hiriskpaul]

An interesting discussion, but I am in complete agreement with richfool. BT have a contractual obligation to fund these DB pension commitments. They cannot simply change the terms because directors decide the pension commitment is unaffordable or "unfair", any more than they can unilaterally decide to pay lower interest on bank borrowings or issued bonds. If that is inconvenient to shareholders, then that is just tough. Shareholders are at the bottom of the hierarchy, entitled to profits, but only after all other financial commitments have been met. Onerous legacy pension commitments is part of the risk one takes in being an ordinary shareholder.

BT are going to court to try to switch the C pool from RPI to CPI. I am not sure what legal arguments they have for this, but I would expect the High Court to throw out any arguments along the lines of the scheme being "unaffordable" or "not fair" to other pension pools.

Of course if the C pool commitment really is unaffordable, then essentially BT are saying that they are heading towards default and need a bailout. In that circumstance it would be perfectly legitimate for BT to negotiate a settlement with the pension fund, but they should do that by negotiation with all their creditors - not just the C pool pension fund. If I was a BT pensioner, my first question to BT would be "How can you afford to pay dividends?"

Whilst I can see your point, and essentially I agree with it, why should BT pensioners be treated better than others who have had their rises aligned to CPI rather than RPI, or those who have worked towards a state retirement age and paid taxes and NI on the basis of what was promised?

It comes down to the precise legal meaning of the contract. If it can successfully be argued in court that the C pool pension terms permit CPI to be substituted for RPI, then the pensioners have to accept it, regardless of what they considered the agreement to be. If not, then BT have to keep paying RPI increases. If the switch to CPI is legal then a legitimate question for shareholders would be "Why was this not done years ago?".

In general, what pensioners believe has been promised may not be legally watertight, what is legal may not be fair and what is fair may not be legal. I have no idea about the legal basis for state pensions but as the government can change laws and has altered the state pension a number of times, I would imagine any perceived entitlement is on flaky grounds.

As I mentioned in an earlier post, Local Government pensions were changed in this way several years ago and there was little or no fuss made about the reduction in benefits compared to what was promised to employees when they entered the scheme anything up to forty or more years earlier. One could argue, as you have, that the local authorities should cut back on their expenditure on services if they cannot meet their contractual obligations to their past and present employees, but I suspect this argument would not be well received.

You amaze me! Are you sure the change was not such that existing pensioners were protected and those still accruing had existing entitlements protected but new accruals subject to CPI increases? Or some similar deal? I don't know much about local authority pensions, but I know a few people in the NHS pension and Teacher's pension and thought this was the type of thing that happened when new pension schemes came in. Some employees also had the option of staying on the old scheme or accruing benefits under the new scheme instead.

Regardless of legal small print, I think it grossly unfair to renege on pension commitments. Pensioners should get the spirit of what they signed up for, even if that does turn out to be expensive for shareholders and/or taxpayers. Many people have a choice to work in either the public or private sector and typically the public sector might have paid less, but came with a better pension. I chose to work in the private sector, mostly in small companies with no pension at all, but I earned more than I would have done had I worked in the public sector. That was my decision and I don't begrudge those receiving inflation protected DB pensions as that is what they signed up for.

[Alaric]

Pensioners should get the spirit of what they signed up for,

The spirit of what they are getting is that their payments will increase every year in line with general rises in prices. It's the small print of which measure of this to use that's being argued about. For those just retired or retiring in the near future, they didn't necessarily have an expectation of guaranteed increases forty year ago when they joined schemes. It's only Government action that made pension increases mandatory and only then on part of the years of service.

[staffordian]

There is one other big difference between private and public sector that never seems to get aired.



In the public sector, pensions are a huge Ponzi scheme, and accounted for by government in a way that would land any private company director in jail.


We thought the bank bailouts in the GFC were expensive - they are less than the unfunded public sector pension liabilitiies.

You refer to public sector schemes as though they were all the same. I made specific reference to the Local Government scheme and this is most assuredly not an unfunded Ponzi scheme. Most county councils or groups of councils administer superannuation funds into which the employee and employer contributions are paid, and out of which the pensions are paid. These were (in general) quite self sufficient, though have perhaps been more vulnerable since Brown taxed their income a decade or so ago. But the information I receive about my scheme suggests it is still in rude health.

[staffordian]

You amaze me! Are you sure the change was not such that existing pensioners were protected and those still accruing had existing entitlements protected but new accruals subject to CPI increases? Or some similar deal? I don't know much about local authority pensions, but I know a few people in the NHS pension and Teacher's pension and thought this was the type of thing that happened when new pension schemes came in. Some employees also had the option of staying on the old scheme or accruing benefits under the new scheme instead.

Regardless of legal small print, I think it grossly unfair to renege on pension commitments. Pensioners should get the spirit of what they signed up for, even if that does turn out to be expensive for shareholders and/or taxpayers. Many people have a choice to work in either the public or private sector and typically the public sector might have paid less, but came with a better pension. I chose to work in the private sector, mostly in small companies with no pension at all, but I earned more than I would have done had I worked in the public sector. That was my decision and I don't begrudge those receiving inflation protected DB pensions as that is what they signed up for.

I was wrong about there being no fuss, but it was imposed on existing pensioners when they were led to believe they would continue to get RPI.

This Telegraph article gives a little background...

http://www.telegraph.co.uk/finance/pers ... Court.html

[hiriskpaul]

Pensioners should get the spirit of what they signed up for,

The spirit of what they are getting is that their payments will increase every year in line with general rises in prices. It's the small print of which measure of this to use that's being argued about. For those just retired or retiring in the near future, they didn't necessarily have an expectation of guaranteed increases forty year ago when they joined schemes. It's only Government action that made pension increases mandatory and only then on part of the years of service.

The RPI/CPI issue is arguable, but I know which I would prefer if I was receiving an inflation linked pension and I know which I would prefer if I had the liability!

I think it is worthwhile pointing out that not everyone retiring now signed up 40 years ago. I know a number of people reaching retirement age who have only accrued 10-20 years of a pubic sector pension (teachers and civil servants). Quite a few women fall into that category who were out of the workforce for child rearing and some people previously worked in the private sector. For these people the pension promises were clear and a very important part of the whole package.

What I find totally unfair is the very low LTA put on DC pensions compared to what is allowed for DB pensions, but that is not the fault of DB pensioners, although it probably is the fault of some people in DB pension schemes!

[hiriskpaul]

I was wrong about there being no fuss, but it was imposed on existing pensioners when they were led to believe they would continue to get RPI.

This Telegraph article gives a little background...

http://www.telegraph.co.uk/finance/pers ... Court.html

I can see both sides of this argument. It would have been very common for most people to consider that inflation was properly measured using the RPI and if you were promised something "inflation linked" with "inflation" not clearly defined, then RPI would have been the natural assumption. Index linked gilts are based on RPI for example. On the other hand, the RPI calculation is fundamentally flawed as it is based on an arithmetic average rather than a the geometric average that CPI is based on and as a result RPI is more likely to overstate inflation than to understate it. CPI is symmetric in this respect, but has other flaws such as omitting housing costs. I would be hopping mad if I held an indexed linked gilt and the government unilaterally decided to switch the indexation to CPI, which is similar to what went on here but the High Court let the government get away with it. Did this go to Court of Appeal and the Supreme Court?

[tjh290633]

I've never had a DB private pension, only a DB public one, but as I understand it the company pension scheme is not fully ringfenced from the company finances, money can flow both ways, to the company if the pension fund is doing well, and the reverse is badly, and both have occurred over the last 40 years.

I think that your understanding is wrong. Look at the example of Robert Maxwell.

When a pension fund was overfunded, legislation required that a contribution holiday had to be taken, but never, as far as I know, has pension fund money been legitimately passed back to a company.

TJH

[Lootman]

I think this is entirely unrealistic. People who have chosen to invest capital in risky shares either know what they are doing or believe they do . Either way they know what they are choosing to do. To compare a 16 YO apprentice 50 years ago starting work in a 'good' secure job with a pension - say the GPO - as equivalent to a high flyer going for a financial job in the city with "bonuses" is, IMO, just ridiculous!

Exactly my situation 44 years ago. I am pleased to say that my ex employer has run a terrific retirement plan even though it no longer exists. It really was/is deferred salary and the company kept its promise.

That's great for you, but all you are really saying is that you were successful in getting other people to subsidise you, and many were not that lucky. It's not a rational basis for funding everyone's retirement, any more than winning the lottery is. You're basically saying "I'm all right, Jack".

[Lootman]

That's great for you, but all you are really saying is that you were successful in getting other people to subsidise you, and many were not that lucky. It's not a rational basis for funding everyone's retirement, any more than winning the lottery is. You're basically saying "I'm all right, Jack".

Rubbish. The company paid a % every month into the fund and so did I. Nobody subsidised it. I stayed at that company largely because of the excellent pension. Since I left, I have earned anything up to 4x my typical salary, naturally, I accrued my SIPP from the extra pay. Nobody subsidised that either.

Depends. If the fund in question has sufficient assets to pay what you were "promised" then you have a point.

If it does not then somebody else is carrying you.

[Lootman]

The only people who could possibly claim to have subsidised the pension plan are the shareholders. But nobody is forced to buy shares and due diligence should warn any would be share holders off if pension obligations is a concern. Ref - BT, BAE Systems, Royal Mail etc....

Yes, you are being subsidized by the shareholders, and of course shares are significantly held by pension funds. So your pension is being subsidized by other pensioners. In other words, you've been lucky and others have been unlucky.

[Lootman]

No, I can't agree that shareholders have been subsidising my pension. A pensioner is a company stake holder just like a worker or a share holder. The share holder invests by choice. If he thinks he his going to subsidise pensions then he shouldn't invest. Truth is a pension obligation is a cost of business just like any other and an investor needs to look at whether the business is still atrractive to invest in after cost of business. The share holder has a choice he doesn't have to invest if he feels unfairly burdened for any reason.

That's certainly a point of view and one that I would expect someone in your position to support. You're not stupid, neither am I, and if I could get a good deal at the expense of somebody I don't know getting a worse deal, then I'd do it too.

My point is restricted to the observation that, as both a voter and a shareholder, I think that if times get hard then you should share the pain rather than claim immaculate immunity.

[hiriskpaul]

The only people who could possibly claim to have subsidised the pension plan are the shareholders. But nobody is forced to buy shares and due diligence should warn any would be share holders off if pension obligations is a concern. Ref - BT, BAE Systems, Royal Mail etc....

Yes, you are being subsidized by the shareholders, and of course shares are significantly held by pension funds. So your pension is being subsidized by other pensioners. In other words, you've been lucky and others have been unlucky.

I don't really see that as a subsidy, any more than saying bondholders are being subsidised by shareholders.

It would be reasonable to say that pension scheme members of the bailed out banks were subsidised by taxpayers, but in that case so were bondholders and preference share holders.

[Hariseldon58]

There are a couple of points worth mentioning, companies agreed to pension schemes under a set of rules and tax rules that have subsequently changed.

Eg tax reclaim on dividends , unfair terms for early leavers etc provided a subsidy to the remainers.

Low interest rates and rulings that bonds should form a large part of a pension fund inflate the cost of providing returns for pensioners. I can imagine that some schemes might hold more equities for long term commitments if they were allowed to.

Ultimately companies made promises they should keep and they would have been prudent to change schemes years ago, the writing has been on the wall for almost 20 years ago that pension schemes can grow at an alarming rate and even dwarf the sponsoring company.