The Pensions Crisis


The words "pensions" and "crisis" have become inextricably linked. The November 2001 BBC Moneybox Special had "Pensions in Peril", looking at Ravenhead Glass, which had gone bust with a pensions deficit. 2002 saw more examples of small companies in the same position, including United British Shoe Machinery, Albert Fisher & ASW.

November 2001 saw the first in a series of excellent papers from UBS "UK pensions following FRS 17", which has the best grasp of pension economics of all the investment banks. Other banks commenting included Schroder Salomon "Son of MFR: FRS 17" and Deutsche Bank "The end of the equity cult?"

As the FTSE hovered around 5,200 in the first half of 2002, the debate on the right assets for pension funds continued to rage. John Plender "Small evacuation from UK equities", Philip Coggan "No more easy answers on assets" & Anthony Hilton "Time to come clean on the big pensions problem", all cited Boots as an alternative model.

In June 2002 Merrill Lynch hosted a well-attended seminar "Equities and Bonds in Corporate Pension Funds: Is Boots right?",with contributions from me (answer "yes"), Andrew Dyson, from Merrill Lynch Investment Management ("no") and Dawid Konotey-Ahulu, from Merrill Lynch Capital Markets ("maybe").

Two ex-JP Morgan practitioners, Roberto Mendoza & Peter Hancock threw their considerable weight behind pension funds holding bonds in an FT article "Risk & transparency in pensions". Ben Alexander is another practitioner who applied financial economics, especially Fischer Black, to pensions in general and Boots in particular. His London Business School dissertation is "Gentlemen prefer bonds".

By the end of June 2002 the FTSE had fallen 10% to 4,656 and more people were starting to sweat. The July FT headline says it all "Market turmoil hits company schemes hard: A fissure in pension fund accounts has turned into a gaping hole for some".

As well as a paper "Pension funding in Europe" in September 2002, UBS produced a major report "FRS 17 one year on", compiling and updating FRS 17 numbers for the FTSE 100. Alarmingly, they suggested equity markets may still not have properly priced pension risk, with comment from Martin Dickson "Just how heavy is the pensions millstone?".

Watson Wyatt's estimate of UK pension underfunding reached £75bn in August 2002. Articles appeared in September and October entitled "On the edge of a credibility gap", "Bubble, bubble, default trouble" and "Adding to the pyramid of risk", from the formidable trio of Philip Coggan, John Plender & Barry Riley. The FT also had a letter "Bursting a pension funds bubble".

As we got into 2003, with the FSTE a whisker under 4,000, down for the third year in a row, people were outdoing each other in their doom and gloom. Watson Wyatt's 2003 Global investment review has a lead article of "Stormy weather for the capital markets". UBS updated its estimates of FRS 17 deficits sub-titled "The pain gets worse", as well as a new piece on the FTSE 350.

Morgan Stanley's January Paper "UK pensions: Is it just a storm in a teacup?" grabbed the headlines with an estimated deficit of £85bn (see FT article),which was used by Philip Coggan in his March full-page analysis "The £85bn question". The annual Barclays Equity Gilt Study was also published, showing that for the third year in a row, bonds were a better investment than shares.

The first quarter of 2003 saw Martin Wolf "UK awakes from pensions dream" and "Losers of the pensions lottery", and John Kay, in the FT "The real culprits in the Pensions Crisis", as well as Leaders, "Pension Woes" & "Pension Plans". The Times' Patience Wheatcroft had "Pain of ending pension holiday".

For good measure I include an March FT article of mine "A challenge to the equity cult". The BBC personal finance page also picked up on the themes for individuals in "Confronting the pensions crisis".

Given all the doom and gloom, the February Daily Telegraph advice from Christine Farnish, Head of the NAPF, for companies to "sweat it out and wait" "Pensions crisis, what crisis?" may not be entirely tongue-in-cheek.

For those of you who think my selection of articles is unduly biased, I include a piece from March's FT by Alistair Ross Goobey (son of George, Father of the Cult of the Equity etc), entitled "Quashing the pension fund scare stories".

The credit rating agencies finally took notice of pensions as a credit issue and S&P put 12 companies on credit watch. ABN Amro came up with another 10 companies facing credit downgrades due to their pensions "Pensions crisis gathers pace".

Not all bad news - it was revealed in March 2003 that 65% of the £3bn BMW fund for ex-Rover workers had been switched to bonds in 2000.

The long awaited and long delayed Pensions Green Paper of December 2002 was alarmingly complacent. The House of Lords Debate, opened by Lord (Norman) Fowler, was much less complacent. It is very wide ranging, including comments on FRS 17, Boots' strategy, the responsibility of actuaries and the MFR.

John Plender, a passionate advocate of transparency, has some very interesting comments on the Brookings Institution Working Paper "Did higher stock prices cause stock prices to rise?" This concludes empirically what we knew anecdotally - pension surpluses caused by bullish equity markets in the 1990s fuelled the stock market still further. Great on the way up, not so good on the way down.

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