Welcome to my first newsletter of 2012. Here’s wishing you all a happy and prosperous New Year.
This month, I cover ……
Final, final, nail in the coffin of Final Salary Schemes
Late last year the Court of Appeal ruled on the Nortel case – where a ‘contribution order’ is made by the Pension Protection Fund after the employer goes into insolvency (and it’s the PPF who control the timing), the deficit on the fund is an expense in the insolvency, it has to be paid ahead of secured and other creditors, yes even the IP’s fees! Just before Christmas the BBC reported that 4 out of 5 of the UK’s 6,500 pension schemes were in deficit – the total deficit had risen by £60 billion to £220 billion between September and November – some say it’s because bond yields have fallen due to the quantitive easing. The National Association of Pension Funds recently warned that proposed new European laws would increase the likelihood of employers with pensions failing. It all looks like bad news. What’s really gone on here?
Let’s look at what’s been happening over time: 1988: at a time of booming stock markets the Conservative government taxed ‘overfunded schemes’ (defined as having just a 5% surplus), pushing up tax revenues by £1 billion a year, and giving companies a reason to cut contributions into funds. Early 1990s, sharp recession, government needed cash, the Conservative government reduced the tax credit on dividends paid into pension funds. 1997: the Labour government withdrew tax relief on pension fund investment income, estimated cost to funds of £2 billion pa. 1998: the DSS produced a green paper ‘A new contract for welfare: partnership in pensions’, which said that private pensions schemes were in rude health. The report was hopelessly over optimistic, particularly as regards peoples’ life expectancy (pension fund liabilities). 2004: Pensions Act introduced, forming the PPF. 2009: £200 billion of quantitative easing. The 30 plus year bull stock market came to an end. Previously reported levels of pension fund assets proved to be overstated, earlier income yields were no longer achievable, liabilities massivley understated. 2011: more (£75 billion) quantitative easing. December 2011: the PPF estimated that its 2012/13 levy would generate £550 million, this levy, imposed on final salary funds, is designed to cover pensions shortfalls arising on employer insolvency.
My views are as follows. Every government for the last 20 odd years, regardless of who was in control, used private sector pension schemes to directly and indirectly increase short term tax revenues. Longer term implications and boom/bust business cycles were conveniently ignored, figures ‘fudged’ to justify what they were going to do anyway. They got away with this because the people ultimately effected by their actions, private sector employees, were divided, too distant, too weak to fight back, it was almost as if it was free money. The PPF levy cannot possibly properly reflect the insurance risk: it’s like a 17 year old learner driver insuring a Bugatti Veyron Super Sports car (cost £2.4m) for £6,000 a year, about double the cost of insuring a 2004 Ford Ka! With a realistic ‘self insurance cost’ proving too high and the public purse empty, the government simply had to find another ‘tame’ payer, people or organisations who were divided, distant, too weak to fight back, or who lacked public sympathy. And that’s where the banks (because they fund businesses, secured over their assets) and bond holders (for example pension funds) and creditors of bigger businesses come in. And what better way to achieve it by writing the law as you’d like?
There’s going to be trouble ahead with major employers and funds failing because if the current downturn has shown us one thing, it’s that maximising short term gains ultimately ends in huge longer term pains.
Do the public sector unions think we’re going to be sympathetic to their attempts to protect their members’ pensions when their employer has had his hands in our pockets and the unions were silent as our schemes were plundered?
Think that what’s happening on the other side of the pond is the elephant in the corner of the room?
If you do, here’s an interesting court decision I found for you – the aptly named Rakoff case – where the SEC had its knuckles severely rapped by a Judge for daring to try to get the court to rubber stamp a dingy bar room deal with Citigroup. The judge didn’t mince his words, the SEC didn’t get close to even first base. While the US judiciary appears to be trying to uphold their standards, it’s clear that others around them are not. I wonder how many deals are being agreed under the table to keep the wheel on the US bus?
And finally this month….
I’ve kept the newsletter short, because many accountant readers are busy at the moment with clients’ tax returns. I’ve taken the time instead to completely re-write all of my websites, www.midlandsbusinessrecovery.co.uk, www.in-solve-ncy.co.uk and www.businessresuscitationprogramme.co.uk. And there’s a few things I’d like to draw to your attention. How many IPs do you know have a client charter? Or post their rates and expenses policy for all to see on the web? – including comparisons with national and local competitors? - It’s not that I’m any less expensive, I just don’t shy away from any debate because I believe I add real value to what you do, what your client is looking to achieve and retain wealth in the Black Country largely through my Business Resuscitation Programme work. Once you’ve read those pages, ask yourself, why don’t all IPs provide the same level of openness and value?
Speak again next month, in the meantime I’d be glad to look at any clients you believe could be at risk.
Copyright © 2012 Midlands Business Recovery, All rights reserved.
Our mailing address is:
Midlands Business Recovery, Alpha House, Tipton Street, Sedgley, DY3 1HE
Tel: 01902 672323
‘The local insolvency practice offering real solutions’