Court throws out BT's plans to reduce pension rates Plans by BT to cut its huge pension deficit have been thrown out by the High Court in England. The UK's incumbent telco had wanted to shift the rate used to calculate final salary pension payments. In December 2017, the telco sought a decision from the High Court to change the index used to calculate pension increases paid in …
With 9,921.83 million shares and a total annual dividend of around 15p per share they are paying out over £1 billion per year in dividends.
When there is a liability shortfall be it pensions or creditors then no dividends (or greatly reduced ones) should be paid until the shortfall is cleared, anything else is just robbing the pension fund by stealth.
they are paying out over £1 billion per year in dividends.
When there is a liability shortfall be it pensions or creditors then no dividends (or greatly reduced ones) should be paid until the shortfall is cleared, anything else is just robbing the pension fund by stealth.
Not really (and I speak as a BT section C deferred pensioner). The pension benefits and fund contributions were calculated based on expected market returns on investments 40 years ago, and the market isn't giving those returns. Nothing is "robbing" the fund, it's just not seeing the increased finance it needs to meet the now-unrealistic promised benefits. For one thing, all pensioners in that fund retire at age 60, and their pension will be paid from that date whether they want it to be or not. Just changing that date could help.
As for dividends, do bear in mind that they are repayments to investors for their money, just as interest is a repayment to a bank in return for a loan. If you stop paying dividends those investors will want their money back, i.e. they will sell their shares, which will depress the share price. That won't matter significantly to BT, but it will matter to all the other pension funds who have invested in those shares. That sort of kee-jerk "soak the rich" reaction isn't actually going to affect the people you think it is, and another £1bn for the pension fund isn't enough anyway.
Except that American companies don't typically pay regular dividends on their stock. Occasionally money will be returned to investors.
It doesn't detract US investors, instead they look for a growth in stock value.
Companies that are running a large pension deficit should have dividend payouts restricted. Otherwise if/when companies go bust with a big pension deficit the pension protection fund (www.pensionprotectionfund.org.uk) picks up the pieces e.g. Carillion and BHS. This in turn is funded by levies on other eligible pension funds that are well run.Too many of these and that levy will have to rise and we all end up paying for companies that don't fund their pension funds properly.
Tell that to the pensioners of Sears Canada (and probably the US as well). It recently declared bankruptcy and, after a liquidation "sale" of the available product, closed all the doors. The pension plan is very 20% underfunded although Sears Canada was paying billions of dollars in Dividends to its owners, mostly, Sears US, while not topping up the fund. The pensioners were warning that Sears was going belly up from at least 2008, yet nothing was done because there was no law requiring them to do so.
For one thing, all pensioners in that fund retire at age 60, and their pension will be paid from that date whether they want it to be or not. Just changing that date could help.
So, what you are suggesting is that people who were due to start receiving their pension at age 60 would be happy to say, "No, keep that money that I was contractually promised". How long would you like them to defer it until? 61? 65? 70? Why not go for 130, and then they won't have to pay it to anyone.
So, what you are suggesting is that people who were due to start receiving their pension at age 60 would be happy to say, "No, keep that money that I was contractually promised".
Well, if it was a choice between "wait 2 years" or 'take a 20% pension cut" I think the wait might be the lesser of two evils. Especially since I won't get the rest of my pension until somewhere between 63 and 67 anyway.
they are repayments to investors for their money
Only very tenuously. The only people who actually "invest" in companies are people who buy freshly-issued stock. The company receives no money from people who buy those shares subsequently: they don't "invest" in the company at all, they simply speculate on its ability to generate future returns.
The resale of shares is the way the original investors can get a return on their investment, but that's a very small amount of the market by volume of share trades. It's principally the present speculators who would be disadvantaged by a rule prioritising pension funding over dividends - future speculators would factor that into their speculation by marking down the share price.
Unfortunately, of course, your & my pension fund may well be one of those present speculators that would be disadvantaged.
"The pension benefits and fund contributions were calculated based on expected market returns on investments 40 years ago, and the market isn't giving those returns."
In the interim, when things were going well or high interest rates had raised projected returns on annuities, IR/HMRC would have declared the scheme to have been over-funded and ordered a contribution "holiday". Continuing to fund an over-funded scheme is counted as tax evasion. Not avoidance, evasion. Civil Service pensions, like the state pensions, closely resemble Ponzi schemes in that they're paid out of current income, in this case tax income. That means that tax officials never have to think seriously about the real long term of funded pension schemes. (My own declaration of interest here: both BT and CS pensions.)
"That won't matter significantly to BT, but it will matter to all the other pension funds who have invested in those shares."
It would matter to some extent to BT as harming other pension funds would require action that could then harm the companies those funds serve and in which the BT pension fund is invested.
It's depressing, however, how many people commenting here never seem to catch on to the simple fact that share holders are very largely institutional and they probably have a direct personal interest in them; they are amongst the "fat cats". The education system really needs to look seriously at how it teaches (if at all) the basics of finance.
https://www.ipe.com/ofcom-review-questions-bt-pension-holidays/33418.fullarticle
So yes, they stopped funding ... and now claim "hey, there is no money!!"
"Like many companies, BT's pension scheme was in funding surplus in the early 1990s. As a result of tax changes, it was not beneficial for the company to maintain a large surplus. Like many companies, BT did not make contributions into the main scheme between 1989 and 1993, although pension liabilities continued to accrue,"
As a result of tax changes Gordon Brown blundering about trying to find some more 'stealth' taxes. FIFY
BT pensioners may like to reflect on the fate of Equitable* customers, who also went to law to try to force their pension provider to pay them what they thought they were entitled to. They (and other Equitable customers) are now getting far less than they would have done had they accepted the deal they were offered.
* I'm not claiming the circumstances are identical or that neither business had done anything wrong. Just that 90% of the time, when you go to law, the only ones who benefit financially are the lawyers.
And there was me thinking it was Nigel Lawson under Margaret Thatcher who introduced the Finance Act in '86 which lead to all the big corporations taking massive pension holidays; silly me.
Mind you, the corporations had other options than just grabbing the money and spending it on bonuses and dividends; they could have decreased the pension "surplus" of the time by increasing pension benefits for the fund members, for example. So they're not blameless in this whole mess either.
That is correct and when you then add in the disaster of the Labour/Brown decision to allow a corporate contribution holiday because pension finds had huge surpluses it is not hard to see why we are here. Future liabilities were easy to see and calculate but pressure from shareholders and directors to take more in profit (dividends) won the day.
Then add the second raid when pension funds were taxes (that still has not been reversed). The only way this is going to be rectified (given that it is now far too late) is for these huge companies to charge more for the services they provide. That means we will have to pay more and will further disadvantage then against the likes of Amazon and all the other tech based, venture capital funded, tax-avoiding scum.
So, how old would you like to have to be, hanging from the top of a pole in all weathers or lying flat out on the pavement in the wind, pi**ing rain and snow over an open joint pit reconnecting the lines after the p**eys nicked the copper including the junctions?
So, how old would you like to have to be, hanging from the top of a pole in all weathers or lying flat out on the pavement in the wind, pi**ing rain and snow over an open joint pit reconnecting the lines after the p**eys nicked the copper including the junctions?
No idea, I was in a software house :) The only time we got to do that was the notorious "Mod A" and "Mod B" training that everyone with "engineer" in their job title had to do. I still have the hard hat, really useful for a Fortran programmer...
"As for dividends, do bear in mind that they are repayments to investors for their money, just as interest is a repayment to a bank in return for a loan. If you stop paying dividends those investors will want their money back, i.e. they will sell their shares, which will depress the share price. That won't matter significantly to BT, but it will matter to all the other pension funds who have invested in those shares. That sort of kee-jerk "soak the rich" reaction isn't actually going to affect the people you think it is, and another £1bn for the pension fund isn't enough anyway."
If the company has a massive pensions deficit, then those investments haven't yet returned any profit for the investors... So why should the investors get dividends?
That's the shortfall. The fund is supposed to go massively in surplus in the good times, to keep paying policyholders in the thin times. In the boom 80's big companies got let off contributing as they claimed the surpluses were a waste of good money.
It's yesterday's theft that leads to today's shortfall.
>It's yesterday's theft that leads to today's shortfall.
Whilst it no doubt has contributed to it, just remember in today's economic climate, if you (and your employer) have not been making contributions totalling between 20~25% of your pensionable salary since circa 2007, you are underfunding your final salary pension and simply increasing the shortfall...
use the money you give out in dividends and bonuses to shore up the pensions gap
There's a few rather large problems with that.
1) The dividends are primarily paid to other pensioners / pension pots. No dividends means no investment, means tanking share price.
2) The share price directly influences the cost of capital for companies such as BT, thus making its loan book exponentially more expensive to finance, leading to the sort of cost cutting that really would make your eyes water.
3) Inability to meet debts as they fall due leads to bankruptcy, which leads to the end of accruals in the pension scheme and a transfer to the PPF, assuming it has resources available to suppor tthe scheme.
4) That leads directly to a minimum 10% cut in pensions paid and thereafter increases by the rate of CPI anyway.
The union will doubtless hail this as a victory today, but can be assured only of lamenting it in the future. That won't be popular in these parts, but that doesn't influence that facts.
The income BT is able to generate must be distributed in part to the owners, for they would otherwise not fund the business. Capitalism may not be popular with the left, but it is the only system ever devised by man that has proven to alleviate poverty and increase the wealth of all.
"The BT scheme's other sections, "A" and "B", are for staff who joined the company after 1984. Those members are already on the Consumer Price Index (CPI) – which is usually around one percentage point higher than the RPI as an inflation measure."
CPI is usually about 1% lower than RPI. Currently RPI is 4.1%, CPI is 3.0% and CPIH is 2.7%.
https://www.ons.gov.uk/economy/inflationandpriceindices#timeseries
Apart from getting the relative value of CPI and RPI the wrong way round they've also mis-represented who belongs in the different sections.
Section A and B are for people who joined BT before 1984 and Section C for those who joined later (or when the defined pension scheme was closed.
Also section A and B people (the vast majority of pensioners) are on CPI. Why BT set up the new scheme (Section C) with RPI but managed to change the earlier schemes to CPI is unknown to me.
If you think about it wouldn't it seem odd to call the earlier schemes Section C then the later ones A and B?
I work in the industry of pensions and this all comes down to how the rules of the pension scheme where written (probably back in the 70s).
MANY schemes intended for RPI to always be used, but instead wrote, "pensions will increase by a measure of inflation as decided by the Trustees". CPI didn't exist back then, but by the scheme rules it can be used.
Also many schemes wrote, "pensions will increase in line with inflation of the Retail Price Index." This was intended to be the same thing as the paragraph above, but now by law they HAVE to use RPI.
So now any scheme that can switch to CPI has done, and BT tried to say, "well that's what we intended" and the court correctly said piss off.
Sections A&B are a throwback to civil service links pre privatisation. It is written in the BTPS pension deed that these are reviewed annually to the Govts official measure of inflation.
Para 10.2 in the deed states that "Any pension in payment will be increased from time to time in accordance with the Pensions (Increase) Act (1971); and Sections 59 and 59A of the Social Security Pensions Act (1975); as if the pension was payable under the Principal Civil Service Pension Scheme (1974) and any amendment (or replacement) of that scheme".
Many privatised companies, (like BT, BA, etc) whose pensions remained linked to civil service pension increases (remember this was a good safe linkage to have at the time), decided (although they didn't have to) to reduce their pension increases from RPI to CPI when the govt changed the measure for the Pensions Increase Act from RPI to CPI in 2011 affecting all public sector/civil service pensions and those linked to it like BT. There were a series of court cases representing public sector/civil service/ BT/ BA fighting this but they all failed because the increase measure was not 'hardwired'. The Section C pension increase is 'hardwired' to RPI like many other schemes and this is where employers fail. Many are trying. A point to note. Section C is hardwired to RPI but, unlike Sections A&B, it has a ceiling of 5%
This post has been deleted by its author
I haven't checked, but I assume BT were advancing the argument that RPI is erroneous (which it is: the ONS announced they were dumping it as an official measure of inflation in 2013 due to its flawed use of an arithmetic rather than geometric mean).
The ONS did for a while publish an alternative index, RPIJ, which recalculated RPI using a geometric mean instead—but they have recently decided to abandon that on the basis that it was only designed to illustrate how flawed RPI is.
GIven that the government's official statistics authority very publicly states that RPI gets inflation wrong (an effect which compounds exponentially over time), it does seem to me quite right that pension liabilities be determined according to some other index that calculates it correctly instead (e.g. CPI). To do otherwise places a totally unaffordable burden on the fund.
Assuming that this point was litigated, then I guess the court determined the fund's contractual commitments cannot be varied to account for this (long term) error—despite the disastrous impact this will have on it and its members.
Seriously more reliable than BT - the only reason the fund is in deficit is because the took a pension holiday where they stopped paying into the pension fund 'because it didnt need the money' and gave the money to shareholders instead.
Heads they win, tails you loose.
I'd like to see any company with a pension deficit have it's directors bonus recalculated using the following formula
if there is a pension deficit
then
if ( < pension deficit at end of bonus period > is less than or equal to < pension deficit at start of bonus period > )
then
<original bonus> * 1 - ( ( < pension deficit at start of bonus period > - < pension deficit at end of bonus period > ) / < pension deficit at start of bonus period > )
else
No bonus
else Full bonus
So if you reduce the pension deficit by 25% you get 25% of your bonus if you clear all of the deficit or there is no deficit then you get 100% of your bonus.
A quote from the judgment:
I add that this is not to suggest that it is safe to rely on the continued use of RPI by other users as an objective endorsement of RPI's appropriateness, any more than its discontinuance by other users can in itself be relied on as an objective endorsement of its inappropriateness. That is particularly so when the user in question is the state itself, where the mismatch between income and outgoings is particularly acute (taxes and other revenue being based on RPI, while benefits and state pensions are based on CPI). The constraints of policy and the national budget make it difficult to assume that such decisions are founded on an objective, reliable assessment of RPI.
"It's funny to remember that many pension funds in the 1980's were forced to take pension contribution holidays by law"
Add to that the change in how the funds' actuaries were forced to value the assets at 3yr valuation time
(ie market value at time of valuation, instead of purchase price) and we have reaped the perfect whirlwind.
Suddenly, a fund has millions in surplus to be spent on contribution holidays as the stock market peaks [and is deemed 'overfunded by HMRC] and as the market sinks suddenly has deficits below HMRC guidelines... add to that the promises of 'future' benefits for members, in order to soften the blow of the employer taking contribution holidays..well, those benefits needed to be properly funded by increased employer contributions going forward..not paid for out of a potential permanent surplus going forward.. no wonder the funds are 'too expensive' for the poor employer; he's just failed to pay the deferred wages and saved a fortune at the expense of the pension fund members...
Who will gain from all this? The employer got a free ride while the market was high and, when low, closed funds saving perhaps between 15-20% of payroll (depending on how generous they factored the inducements for contribution holidays) . Now they offer to pay maybe 5% towards your replacement insurance company run scheme?
What a lovely hidden pay cut we all got.....if you were the 'conspiracy' type you might think someone wanted to ease the wage burden for British industry and, at the same time, break the influence of the big pension funds on the market.....
I know, I know...never attribute ... when it's probably just incompetence (I forget the full quote and I'm tired of typing..)
"Seriously more reliable than BT - the only reason the fund is in deficit is because the took a pension holiday where they stopped paying into the pension fund 'because it didnt need the money' "
That sort of decision is made by the tax man. He counts such payments as tax evasion. It's not the tax man's problem that a decade or two later the fund is in deficit.
Actually that's a thought: could the pension fund sue HMRC for having made a defective ruling?
This is simply wrong - RPI has various problems of a rather complicated mathematical nature that I don't pretend to fully understand, but compared to CPI it is a paragon of rigour. There are RPI variants, RPIX and RPIJ ( IIRC ), that resolve some of the problems with RPI - there have been no attempts to fix CPI.
Of course this doesn't cover the measurement & calculation issues, i.e. what are the costs/prices being measured each month and how are they obtained, and how are these values being munged into a magic number (cf: the last CPI value being lowered by reduction in air fare contribution to final figure even though air fares themselves actually increased).
The CPIH figure is, of course, so ludicrous as to be embarrassing to anyone who quotes it.
BT is currently proposing to close its defined benefit pension scheme for 11,000 managers
The fact that in 2018 BT is still running a defined benefits scheme, when the writing was on the wall back in circa 2002 and many other blue chip companies read the writing and closed their schemes to new and existing members by circa 2008, should be worrying people, as BT is currently exposed to both the underfunding of existing accrued pensions and future pensions; which given the underfunding has been mushrooming since 2008...
Would it help if the Government of the day did much more to actually control and limit the rate of inflation so that the variances between CPI and RPI were reduced to negligible differences. And, to be honest about things.
The vast majority of inflation in my lifetime has been incurred by Govt. For example, this April a 5.99% increase in Council Tax, plus other increased precepts. For much reduced services.
No doubt that includes the "annual increase in pay which actually isn't a pay increase."
Then of course we've also had the disastrous effect of the Gordon "i'm a fucking genius" Brown years.
I’m surprised no-one has mentioned Gordon Brown's famous (or perhaps not) 'raid on pensions' - the abolition of advance corporation tax relief (ACT) on dividends in 1997.
http://www.bbc.co.uk/blogs/thereporters/evandavis/2007/04/that_pensions_raid.html
People argue whether it was the main thing that killed final salary pension, or whether other changes were less or more significant (such as use of CPI rather than RPI in pension calculations, or the move to FRS17 valuations of pension schemes), but I don't think anyone argues Gordon Brown's move was positive for pensions.
If you do an Internet search for "Gordon Brown" "pensions raid", you will get a lot of hits, many giving different, but large, values for how much it brought the Treasury.
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