Uncomfortable truths? Pensions Institute takes aim at employers

Keith Wallace, president of The Association of Corporate Trustees, identified 35 ways an employer can extract surpluses or dodge pension obligations in a paper written for the Institute.

While the various tricks for milking surpluses detailed in Wallace’s paper are unlikely to be repeated in today’s deficit-laden world, the variety of methods for shedding pension liabilities makes for more troubling reading.

Not all of these methods, as Wallace points out, can be considered criminal.

“Others were and are entirely lawful and may even, in the eyes of other interested stakeholders, have been commendable,” he writes.

But he is equally clear on the scale of the challenge facing the Pension Protection Fund and wider industry, calling the motivations behind milking and dumping “endemic in a capitalist model, where proprietor profit is supported by the ingenuity of advisers”.

Perhaps most unsettling is his claim that while the PPF “has clear objectives and every appearance of achieving them”, the threat of the lifeboat and its reduced benefits can be used to bully trustees.

Last year the Pensions Institute identified 1,000 schemes at “serious risk” of falling into the PPF.

Wallace confirms that while only a select few schemes have made the headlines in the past year, “the profile they present masks similar, if less immediately severe, issues for many other schemes and their sponsors”.

What led to deficits?

Equally interesting is Wallace’s exploration of the factors behind today’s pension deficits, which offers a welcome response to the 'blame the Bank of England' conclusion offered by the Financial Times’ Merryn Somerset Webb in a recent column.

Among the drivers suggested are the industry’s failure to adapt to the introduction of tax on dividends, dramatic changes in longevity and indexation requirements imposed by statute.

“It has indeed to be questioned whether the 'surpluses' from the 1970s onwards, over which so much attention was lavished and negotiation expended, were not merely paper ephemera,” writes Wallace.

Affording schemes debt priority in the event of insolvency features among Wallace’s suggested solutions, alongside relaxing 'non-amendability' rules.

With the Bank of England announcing a cut in interest rates to just 0.25 per cent last week and gilt yields set to fall even further, trustees and employers may be hoping for a quick and radical solution to their problems.