Analysis: The current pandemic-led economic crisis, coupled with the fact that some of the biggest defined benefit schemes are sponsored by quasi-governmental institutions, has led to suggestions that the government should nationalise these pension funds.
Despite being considered a “radical idea” that would need legislation to be put forward, several pension specialists can see the benefits of the government taking ownership of pension funds such as the Railways Pension Scheme or the Universities Superannuation Scheme.
The discussion was launched by David Cule, principal at Punter Southall Group, in a letter to the Financial Times, where he explained that the government would intervene if the sponsors of these schemes were close to failure.
In fact, due to the current coronavirus crisis, the government is already taking the financial risk for meeting employer contributions to the RPS under a new multibillion-pound rescue plan announced on September 21. According to the FT, these costs are about £150m–£160m annually.
It is perfectly rational to transfer all such pension assets and liabilities to a government starved and in need of current assets but very happy to accept long-term liabilities
David Cule, Punther Southall Group
RPS is one of the UK’s largest pension schemes, with £27bn of assets at December 2018 and 344,000 members, including almost 96,000 current employees. According to an estimate from the Pensions Regulator, the scheme had a deficit of £7.5bn in June 2018.
If the sponsors are not allowed to fail, Mr Cule noted: “It is perfectly rational to transfer all such pension assets and liabilities to a government starved and in need of current assets but very happy to accept long-term liabilities.”
He cited the example of the Royal Mail privatisation in 2013, when the government transferred the postal company’s historic liabilities of around £40bn to a new public sector scheme — the Royal Mail Statutory Pension Scheme — to be administered by the government.
At the same time, around £28bn of Royal Mail’s pension assets were transferred to the government, which it used to pay national debt.
‘Radical’ idea gathers momentum
Speaking to Pensions Expert, Mr Cule branded his suggestion as “radical because we are in radical times”. The nationalisation of pension schemes can be done “if there is political will to do it”, he added.
The proposal has received some positive feedback. Penny Cogher, partner at Irwin Mitchell, supports this idea. She said: “I don’t see how some of the current employers can really support the huge schemes like the USS or the RPS.”
The USS has been in the spotlight for the past two years due to an ongoing dispute between members and employers as to how to calculate future pension promises.
The scheme reported a £12.4bn funding deficit as of March 31 2020, largely as a result of falling interest rates and “the devastating impact of coronavirus on global markets”, and it launched a consultation in September with employers over its 2020 valuation, which has already been criticised by its trade union.
Ms Cogher noted that the two pension funds — but in particular the RPS — “provide gold-plated pension benefits compared with the pension arrangements employers provide in the rest of the private sector”.
“As part of the ‘nationalisation’ and the security this gives their benefits, the members should accept some reductions to the actual benefits they are to receive,” she said.
“Going forward, this seems like an opportunity to replace these schemes with two collective defined contribution schemes, in the same way that this was a solution for the legacy Royal Mail schemes.”
Rosalind Connor, managing partner at Arc Pensions Law, noted that this is an interesting idea but it would lead to some scheme sponsors feeling they have been missed out.
“Obviously, there are political arguments about why the government should take some responsibility for certain schemes, but that will lead other schemes to ask why they aren’t being covered,” she says.
“These very big schemes are relying on a large number of employers, but there are other schemes that may not be so big but where one employer is covering a lot of liability — or even a lot compared with the size of the business — who might feel they should be looked at as well.”
The case for ‘special treatment’
However, Ms Connor believes privatised former monopolies present a particularly compelling case. She noted that schemes such as the RPS or the Electricity Supply Pension Scheme emerged from a wave of privatisation where government “left the scheme in the hands of the newly privatised companies and others in the private sector, while often putting in place controls that meant those companies couldn’t take the steps to close to accrual or amend benefits in the way that those in the private sector were doing to control costs”.
“Employers in those schemes might argue they have a case for special treatment,” she added.
Mr Cule also suggested that a similar nationalisation approach should be applied to the Local Government Pension Scheme — composed of local authority-funded pension funds — since the government will be the last guarantor if a local council is at the verge of failure.
This is an idea previously proposed by former pensions minister Ros Altmann. She said: “These are underwritten by taxpayers and are not covered by the Pension Protection Fund, and they have huge deficits.
“Therefore, I would like to see the increased pension assets investing in infrastructure, social housing, environmental and climate change mitigation, etc.”
Employees prefer private schemes
A disadvantage of creating more public sector schemes is that “employees rather like private and funded schemes, rather than government unfunded ones, [since] there is comfort that the money will be there when people retire”, Ms Connor noted.
“Democracy always means that there is no advantage to a government in looking long term,” she added.
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“Few people would be convinced that if the government accessed those schemes to get the assets they need now they would definitely put the money away again when things started to improve, rather than spend it on the other needs of the economy, and leave the pension deficit to a later generation of politicians.”
In his letter, Mr Cule confessed that his proposal would “not address the high cost of continuing accrual of benefits”, which stands at £1.74tn for unfunded public sector schemes, according to the Whole of Government Accounts.
However, nationalising schemes “should be considered as part of the inevitable restructuring of employment norms in our brave new world”, he concluded.
