THE SPECTACLE of British companies queuing up to renege on their pension obligations – foaming at the mouth over the government’s unwillingness to do the same – is not only deeply unappealing, it is also nature’s way of saying that there’s something mortally wrong with modern shareholder capitalism and the way companies are run under it. In Anglo-Saxon capitalism, isn’t accumulating value for shareholders, of whom pensioners should be at the front of the queue, what companies are for? And what executives are more than handsomely paid to achieve?
Of course, there are other culprits for this entirely self-manufactured crisis. The decision of Mr Prudence, Gordon Brown, to end the ACT tax break, thus giving companies the excuse to exploit a short-term stock market plunge and move straight from pension holidays to pension funerals, now looks like the most reckless economic bargain of modern times. Actuarial calculations are an art, not a science. Having ignored the problem of ageing for decades, the profession has now bounced itself into the opposite frenzy of overcaution. Regulation after the event makes life more difficult for the pension good guys, who now have to bail out the bad. Finally, current valuation methods are not ‘conservative’ a better description of snapshot valuations of liabilities that stretch decades ahead is ‘completely daft’.
Yet although outsiders have helped, companies needed little encouragement to pull the plug. Far from being an accident or a surprise, the pensions betrayal is the culmination of a long-term stealth project to transfer risk from the organi sation to the individual. In the name of shareholder value, companies first ditched long-term careers, then sotto voce, the commitment to employment in general. Once a last resort, undertaken only in emergency, redundancies are now for many companies the automatic first response. In this light, axing final-salary pensions is just the final nail in the corporate-welfare coffin. Job done.
Pensions are deferred pay, and as TUC general secretary Brendan Barber has noted, reducing pensions is a pay cut of a particularly blatant kind: although you wouldn’t guess it from the campaign that makes everyone else responsible, companies owe their pension funds at least £20bn in back contributions they elected not to make in the fat years. As late as 2004, when companies such as Rentokil were still basking in pensions vacations, FTSE 100 companies paid out a reported £39.5bn in dividends, compared with just £10.5bn in pension contributions.
So, who does benefit from companies’ worship of shareholder value? The answer is the financial services industry and top managers – the very people whose collusion brought us to this pass in the first place. It is an irony that the investment strategy of Warren Buffet and Berkshire Hathaway is the most effective. Their extreme patience and sumptuous returns exactly match the long-term needs of pensioners. Yet it is the antithesis of what most pension funds do.
Dominated by managers incentivised by shareholder value, company pension funds pursue a management-oriented agenda. The more costs and liabilities can be minimised and short-term investment performance maximised, the larger top managers’ pay packets. Likewise, fund managers’ bonuses depend on assets under management, the result of short-term performance. So they pressure managers to jack up share prices by every possible means – including slashing pensions.
While the pensions crisis is indeed real (except for directors, padded against the pain they are causing others by separate schemes – see table below), it is perfect nonsense to say that nothing can be done. Even investment professionals privately suggest that a government less in thrall to the City and the CBI could put a limit on dividends as a ratio of pension deficits or even – horror! – mandate a dividend holiday. Companies could reward long-term investors with higher dividends. And tax breaks could favour companies that shame the herd by continuing to show that there is an alternative.
To their credit, there are still a few. In his column in Real Business , John Timpson, the chief executive of the eponymous company, recently described sleepless nights when new valuation methods sent the group’s final salary pension scheme lurching into the red.
What was he to do? He duly found a way of keeping the scheme open for new entrants as well as existing members. The retirement age will rise, and it will cost ‘a tidy sum’ to fund the theoretical deficits. But ‘the extra contribution is much less than the pension holiday we enjoyed for 15 years… And when I present our pensioners with their retirement gift, I will be able to look them in the eye with a clear conscience’.
Top Ten Pensioners 2003
NAME COMPANY ANNUAL
PENSION pounds
J-P Garnier GSK 929,000
G Mulcahy Kingfisher 790,000
R Sykes GSK 729,000
N Fitzgerald Unilever 718,000
C Thompson Rentokil 690,000
C Gent Vodafone 662,000
R Wilson Rio Tinto 656,000
H Mogren AstraZeneca 597,000
B Gilbertson BHP Billiton 594,356
J Sunderland Cadbury
Schweppes 589,000
Average FTSE 100 director’s pension
2004: £167,000. Average occupational pension 2004: £6,400.
Sources: www.havingtheircake.com, TUC Pensionswatch2005
The Observer, 15 January 2006