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Regulation
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See JER FT letter "No loose change down the back of the sofa for pensions" (Feb 23rd 2007), plus reply from the Heads of the UK Actuarial Profession
See JER article in FTfm "Strain of protecting pensions increases" (Jan 22nd 2007), plus reply from the PPF Chairman and Chief Executive
See JER letter to the PPF Chairman on the deal made with Heath Lambert (June 9 2005)
See JER article in FTfm "Big company casualties may sink PPF" (Apr 4 2005)
See JER Financial Times’ article "T&N casts a long shadow on pensions policy" (Jul 26th 2004)
See FT comments on JER speech about the Pension Protection Fund Alex Jolliffe (May 17 2004)
See commentary from John Plender (FT) and Anthony Hilton (Evening Standard)on the JER contribution to the Treasury Seminar at 11 Downing Street (Apr 29th 2004).
See JER Times’ article "Britain must learn from US pensions pain" (Apr 12th 2004)
See JER FT article "The real lessons of the Penrose Report" (Mar 15 2004)
See RBC Capital Markets Open Forum Note 6 by JER "Can the Pension Protection Fund work?" (Feb 19 2004) with commentary from Martin Dickson (FT), Anthony Hilton (Evening Standard), Reuters, and Daily Telegraph
See JER Daily Mail article "Pensions facing a domino effect" (October 20 2003)
See JER article in FT "Poor pension insurance is worse than none" (June 5 2003) |
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The Minimum Funding Requirement ("MFR") was introduced by the 1995 Pensions Act following the Maxwell scandal. It provides security for pension scheme members by requiring company sponsors to maintain a minimum value of pension fund assets to meet its liabilities. Any shortfalls have to be met over specific periods of time.
The value of MFR assets required is been reduced since it was introduced, but has always fallen short of the amount required to buy an annuity from an insurance company.
The weakness of the MFR, even for a solvent company, was demonstrated in August 2000. Blagden plc was in solvent liquidation with shareholders receiving cash, even though the pension fund was unable to buy out its pension obligations. Whilst it was generally recognised that a member could lose if her or his company went bust, this new twist produced disbelief and disquiet amongst commentators, including the FT’s Martin Dickson "Death with a difference."
The Blagden case was eventually resolved without members losing, but this was down to the small print of the Blagden Trust Deed and experts were clear that "Blagden will not set precedent on surplus". The Chairman of the Blagden Trustees also wrote, from bitter experience, a January 2003 piece in the FT "UK law cannot fall short on winding-up pensions".
Paul Myners’ had been asked by the Chancellor to review UK institutional investment. The Chancellor seems to have decided that the UK lacked long term venture capital and private equity funding and that such investment would happen if pension fund regulation was weakened. Boots took a robust line on the assumptions of the Review in its July 2000 "Response to the Myners’ Review".
The Myners’ Review produced an interim letter in November 2000 and I wrote an FT letter criticising the proposal to abolish the MFR. "Pension fund rules would be unworkable". Paul Myners defended with a number of actuaries counter attacking.
Paul Myners seems to have been unaware of the ASB’s work on pensions culminating in FRS 17, which by coincidence, was published within a few days of his interim letter. Barry Riley added his sceptical comments in "Mixed response to the new pensions report".
Meanwhile, in September 2000 the DSS, as a separate initiative, had produced a "Consultation Paper on Security for Occupational Pensions", which does not appear to have been co-ordinated with the Treasury sponsored Myners’ Review. (The obvious tension between the DWP and Treasury on pension security continues). Boots response to this paper continued its robust line, which received publicity "Boots backs reform of insolvency laws".
Boots wanted to strengthen security for members and in particular to prevent another Blagden, with a solvent company walking away from its pension obligation. It was proposed that pension scheme members should be given preferential treatment over creditors and the pension debt should be calculated on a market basis.
The full Myners’ Review in March 2001 repeated the abolition of the MFR, which was accepted by the Chancellor in his Budget Speech. However, again separately, with no acknowledgement in the Budget Speech, the DSS simultaneously published "Security for Occupational Pensions : The Government’s Proposals". This accepted the idea of calculating any pension shortfall owed by the company on a market basis and making it a preferential creditor, so members lost only in extreme circumstances.
By the time the DWP in September 2001 published "The MFR : The next stage of Reform" the Government had done a U-turn, ditching the requirement to fully fund, presumably in response to lobbying. I objected both in a Times letter "No time to scrap the MFR" and FT article "Promise becomes a Gamble", whilst the Boots response was also highly critical of the U-turn.
Poor security for pension scheme members was highlighted in a November 2001 BBC Moneybox Special "Pensions in Peril", looking at Ravenhead Glass, which had gone bust with a pension deficit.
Whilst trying to come up with a coherent replacement for the MFR the Government further weakened the existing MFR in March 2002, prompting renewed criticism from me "Pension scheme members’ only legal protection is the MFR" and others in the FT "Changes may save pensions but reduce security".
For anyone who believed this was just an academic exercise there were many small companies going bust with a pension shortfall, including United British Shoe Machinery and Albert Fisher.
In August 2002 the FT published an article pointing out the ability of a company to walk away from its pension promises prompting a stiff letter "How to impose discipline on pension scheme management". We did not have to wait long to see the ugly practice of a solvent company winding-up its pension scheme. In the words of the October 2002 FT headline "Maersk staff left short in new assault on pensions" with "Minister orders action on pension closure". John Plender suggested it was "A company pension more lethal than the bear". The explanation offered by Maersk itself was wholly inadequate. (Click on "News & Press Releases")
More of the same was the wind up of the UK subsidiary of the US giant Parsons "Parsons pensioners fall foul of parent", whilst steel maker, ASW, went bust with a shortfall "Pension likely to be halved".
The long awaited and long delayed Pensions Green Paper of December 2002 was short on increased security, but proposed yet more consultation.
Whatever, the replacement for the MFR,and however long it takes, the actuaries’ professional guidance may require them to also value schemes on the basis of buying out accrued pension liabilities from an insurance company, representing a gold standard.
My comments at a February 2003 conference were well reported "Warning on supervision of pension funds", the speech reprinted in the FT as "A challenge to the equity cult" and I appeared (briefly) on the BBC 10 o’ clock News.
Coincidentally, Sir Roy Goode, who has been quoted only rarely since finishing his Report after the Maxwell scandal, said in an FT article that "Pension law fails to protect employees", picked up in an FT leader with a letter from the NAPF Chairman.
US pension regulation is much tougher than the UK, with ERISA ("Employee Retirement Income Security Act") legislation in place since 1974. This also set up the PBGC ("Pension Benefit Guaranty Corporation") to insure pensions, which is backed by the Federal Government. The Executive Director’s January , March and April 2003 statements make interesting reading on the state of US, and by implication UK, pensions, with comment from Patience Wheatcroft.
As of April 1 2003 the PBGC became Trustee of US Airways’ Pension Plan for Pilots , with an estimated deficit of $2.5bn.
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Updated: 28/6/2010