Is Frank Field about to throw some stones in the glass house of pensions?


Oh the irony.  The house of Commons committee on Pensions is to interview Sir Philip Green about the BHS pension deficit.  This is, of course, the same House of Commons that presides over  the largest Ponzi scheme ever created, the state pension.

But before we look at that let’s hold our nose and consider Sir Philip, retail magnate and former owner of BHS..  For sure Sir P and his family has done rather well out of BHS in terms of dividends, fees etc. (although they sold at a dramatic loss). So what? They owned the business, (which means at the least that they put up the capital to buy it and ran it), and the quasi statutory purpose of any company is to make a profit for its shareholders.

The problem of the  £500 million deficit in the company’s pension fund is not surprising as 5,000 of the 6,000 occupational pension schemes in the UK were in deficit in Feb 15, with an average shortfall of £72 million each. There is no allegation of (Sir) Robert Maxwell like raids on the fund’s cash, but somewhere along the line it is a trifle off key that while the Greens play in Monaco the company is in administration and there is little chance of the hole being filled by anyone other than the UK taxpayer.

But before we assemble the lynch mob let’s just look at what a pension fund deficit is. A pension fund is a relatively simple concept; throughout their employment workers have some money placed in the fund on their behalf.  The fund managers invest it, the funds grow and when the worker reaches retirement age there is a nest egg to provide them with income.  And it works, for some.  The best exemplar is Warren Buffett; $1 invested in his Berkshire Hathaway investment company when he took over in 1964 is worth $11,600 today.  $1 invested in 1990 would be worth $330.  So how the hell have the managers of the BHS fund (and many others) cocked it up so badly?

The short answer is that they probably haven’t.  Company pension deficits are a creation of the pension regulations, themselves created by Parliament.  In simple terms the pensions regulator determines what the cost of a retired person will be to the fund.  If the retiree is contracted to receive £10K per year for the rest of his life (worked out from mortality tables) then the regulator’s job is to make sure that the funds have sufficient assets to be able to pay him (or worse, her as women live longer).  If the total required for pensions is greater than the total in the fund there is a deficit.  So far, so good.

Unfortunately, it does not end there.  The regulations require that once the fund starts paying a retiree his pension, assets are held in “safe” forms such as government bonds.  And the bugger with that is the yield on government bonds us lousy – at the time of writing a 10-year gilt yields 1.59%.  So to yield £10,000 per year the fund for 14 years (assuming a male pensioner) the fund needs to put £140,000 of assets into gilts, where they will earn the fund £2,226 per year.  Had they been left in the stock market in a blue chip like Unilever they would be earning a yield of 2.6%, or £3,640 per year.  It is this shortfall in income that creates the pension fund deficit, and that shortfall is caused by the low interest rate being paid on gilts.

But, you will say, the stock market is risky.  Indeed, but only over the short term.  Berkshire Hathaway (and other long equity funds) has been through every crash since 1964 and yet made spectacular returns for its investors.  Nor are government bonds absolutely secure.  Their value relies upon the belief that the UK government won’t default and the desire for steady, predictable income.  But as the amount of UK debt increases (it has more than doubled since 2006) there will come a moment when investors don’t want any more.  Berkshire Hathaway has significantly reduced its bond holdings over the past few years (in favour of infrastructure companies).

So, back in the House of Commons committee room the Work and Pensions Select Committee will ask where there is a hole in the fund, and Sir Phillip will reply that a combination of government pension investment rules, low interest rates and taxation of dividends (the principle source of pension fund wealth) has created it.  Moreover, last year at the time of sale, it was estimated at £160M, so apportioning responsibility to Sir Phillip is not straightforward.

In fact, the BHS pension fund was in surplus until the financial crash in 2007-8.  Like most funds (including Mr Buffet’s) pension funds invest heavily in stock markets.  BHS had made an agreement with the regulator to rectify the deficit by additional injections of about £10M per year.  Certainly Sir Philip has taken a lot of money out of the company, with some very chunky dividend payments, even in loss making years.  But that is actually a separate issue to the pension fund deficit.

But, whatever the woes of the BHS Scheme, it has assets – £435 million of them in March 2015 which earned income of £62 million.  The number of beneficiaries (including future ones) is 20,000, so that is about £22,000 of asset per member.

State pensions have no assets behind them other than the ability of the government to tax.  Not one penny of an individual’s taxation payments (and particularly not a penny of his or her national insurance payments) goes towards creating a fund for his retirement.  Rather the tax income is immediately passed to pensioners.  In 2016 20% of government expenditure, some £150 billion in total will go on paying pensions.  That is actually more than the total of National Insurance receipts (£126 billion). Successive governments of whatever hue can’t even get the maths right on a Ponzi scheme.

An of course, if I am paying my parent’s pensions I am relying upon my children to pay mine.  However, as they also have the national debt to cover, and their tuition fees etc. and as the population ages I don’t see how they will ever make enough money.  Which means that I will never receive a state pension and that I would therefore be an idiot to perpetuate this morally and financially bankrupt system.

Frank Field, the chair of the Work and Pensions Committee, was famously instructed by Saint Tony to go and think the unthinkable about the whole benefits system back in 1997.  When he did his thoughts were rejected.  19 years later this may well be his swan song.  Expect fireworks.