Herbert Hoover assumed the presidency of the United States in March 1929 just in time to face the infamous Wall Street Crash of the same year and subsequent Great Depression. The difficulties and frustrations of dealing with economic vortices beyond your control are summarised neatly in his observation that “About the time we can make the ends meet, somebody moves the ends.”
My brother, who works for BT, got a bit annoyed with me at the weekend when I ventured to suggest that his employer was bust.
“It’s the pension accounting rules” he said “they don’t make sense. How can a deficit go from £4bn to £8bn in 3 months?”. There was more than a hint in his tone that suggested that the fact that I worked in the second most dubious profession (at least I’m not an MP) meant that I somehow bore an element of personal responsibility for BT’s predicament. So it’s nothing to do with its Global Service division performing badly, I wondered aloud?
But in fairness he had a point and I agreed that the last time goalposts moved so far over such a short period of time was courtesy of those loveable Scottish football fans at Wembley in 1977. We moved on to discuss much more important stuff, such as Joleon Lescott’s imminent departure from Everton. I think he felt that this was a much more depressing prospect than BT going bust.
It set me thinking that if a lay person, with no real interest in the wider pensions world, can see that the pension accounting rules are a nonsense, why can’t the industry? The continuous round of commentators twittering, sometimes literally, about increases and decreases to deficits on a scale most people can’t relate to, only serves to undermine the credibility of the industry at a time when most people are already disenchanted and cynical about pensions.
This causes my brother, and many others like him, to assume that we are overegging the pudding – they assume that the problem can’t really increase by £4 bn in three months, and therefore there probably isn’t really a problem after all. It’s just actuaries and accountants trying to generate a bit of work in the downturn.
My brother is right and wrong (which is a pleasant change for him as he’s usually just wrong). The pensions accounting rules are nonsense, but BT does have a pensions problem and the scary thing is it’s probably bigger than the £8 bn. Given that the value of the business is only about £10 bn, that’s a big problem and wishful valuations won’t make it go away.
Robert Peston at the BBC has produced a good blog on this (“BT: A blacker pension hole”).
This brings us back to the Marathon Club’s, in my view wrong-headed, suggestion that employers be allowed to set their own assumptions for valuing pensions disclosures in their accounts (see previous post “Pension accounting standards – stop snickering at the back”). Human nature is such that employers will always try and put the best spin on financial problems. Failure to recognise the true nature and extent of their pension problems will lead to a failure to address the problem.
The Pensions Regulator has recently re-emphasised the need for prudence when setting actuarial assumptions and the need to understand the strength and nature of the employer covenant. In an unusual move the Regulator, according to the Financial Times, has raised questions about the assumptions BT has used in valuing the scheme’s liabilities. It has taken the unusual step of retaining an external actuarial adviser for negotiations with BT over those assumptions, a sign it is braced for tough talks and that a negotiated settlement might not be possible.
BT may counter that its Scheme benefits from a Crown Guarantee in respect of members working at the time of privatisation in 1984, but, given that trustees can only call on that guarantee if BT goes bust, it’s difficult to place a value on this from BT’s perspective, as opposed to the Scheme. The EU has recently ruled that BT cannot use the presence of the guarantee to mitigate its PPF levy (see Professional Pensions Article). It also means that we all have a vested interest in making sure that the Regulator ensures BT behaves prudently in relation to its funding obligations to the Scheme. The fact that the tax payer carries a large element of downside risk here is not justification for BT and the trustees betting the whole shebang on the 3.40 at Chepstow or carrying undue levels of risk in its funding plans.
It will be interesting to see how this one develops.