The real culprits of the pensions crisis
WHEN I WAS RUNNING a start-up technology business in the 1980s we set up a pension scheme for our employees – it seemed the right thing to do – and if our employees made a contribution to their pension plan, the company made a matching contribution, up to ve per cent of their salary.
One day, I got a call from a financial advisor who wanted to have a meeting with me. He told me that we could use the value held in our pension plan to buy a property from which our business could then operate. I was genuinely shocked by this information. It seemed to me pretty clear that any value in our company’s pension plan belonged to the employees, not the company. But others didn’t have quite the same attitude.
On 5 November 1991, Robert Maxwell, the then owner of the Mirror Group, drowned off the back of his yacht and it quickly emerged that he had completely plundered their pension fund, stealing £440m in order to prop up his other failing businesses.
This created such a scandal that new regulations were subsequently drawn up to ensure that all pension funds had ‘independent’ supervisors, laws were passed to clearly make any attempts to divert such funds illegal, and a new regulator was established to supervise the operation of private pension funds.
So since then, people’s pensions have become much more secure, right?
Well, no, actually, because these days we are facing a massive pension crisis. It has been reported that the gaping hole in private pension schemes has soared from £425bn to £800bn in the last ten years, despite employers pumping in contributions worth £160bn.
Aberdeen-based transport operator First Group has the biggest problem in the FTSE250, disclosing pension liabilities of £4.9bn – more than four times the market capitalisation of the company – and most other schemes also have huge gaps in their funding, independently of how well or how badly they have been run. So why has this happened and who is responsible?
The Parliamentary Select Committee for Work and Pensions have very much enjoyed grilling the Philip Greens of this world about the mismanagement of their businesses causing these shortfalls in funding – but really they should have been looking closer to home – in fact to actions taken by their own parliament.
Back in the 1990s, pension funds were awash with money, their investment portfolios were doing so well that companies often took annual ‘holidays’ from making pension contributions. It was in this context that, almost as soon as he was elected in 1997, Gordon Brown, the new Labour Chancellor, cancelled the tax relief on dividends that had been enjoyed by pension funds. Over the last 19 years this move has taken hundreds of billions of pounds out of the pension system, to the benefit of the Treasury.
And then following the financial crash of 2008, governments of various stripes have kept interest rates at historic low levels in order to encourage companies to invest and rebuild their reserves, but this policy has put a huge dampener on the ‘normal’ returns which can be made by pension investment portfolios.
It is not for me to defend the Philip Greens of this world, but he didn’t actually take any money out of his company’s pension fund. Even the dividends he took from BHS stopped back in 2004, before the pension crunch really emerged.
Many well-run businesses have huge pension deficits, through no fault of their own. And the real culprits are not in business, but in parliament. ■