Slightly hidden away in the bowels of the Daily Telegraph comment section is a piece about Wedgwood Potteries. Sadly this wonderful British institution has faced financial difficulties in recent years and as a result, the pension scheme has had to go into the Pension Protection Fund in order to be rescued. So far so sadly usual.

But the Wedgwood Scheme was a multi employer scheme and one of the employers was the Wedgwood Museum in Stoke on Trent – completely independent of the pottery company itself but with 5 employees who were members of the main scheme. So the Museum became a participating employer as it was required to be. And this is where the whole things becomes a bit unfortunate.

The scheme is what is called a ‘last man standing’ scheme. So any solvent employer who happens to be the last employer in the scheme stands to pick up the whole of the deficit of the scheme – the Section 75 debt. In Wedgwoods case, this is some £134 million apparently. Unsurprisingly this lovely Museum doesn’t have that sort of cash – or rather it does have some of it, but only if it sold off the precious artifacts it holds. And this is what the Pension Protection Fund is seeking an order from the High Court to do.

Needless to say, the locals are up in arms and the PPF is being accused of cultural vandalism by MPs and commentators which is in a sense quite true. It would be a terrible blow to a superb heritage were this to happen. I have no idea what way the Courts will turn in deciding this issue. But it would be wholly wrong to blame the PPF for taking this action. The PPF has a statutory remit to recover as much of the debt as it legally can from the companies or organisations liable to pay it.

If there is any villain in this piece it is the dreadful Section 75 Pensions Act 1995 which has never worked properly since it first hit the statute books and through several attempts to put it right. Those attempts have only led to further complexity and confusion and have acted as a break on genuine corporate activity. Oh yes, and in this case, it is simply unfair.

TPR has issued its latest guidance on the very tricky subject of Employer Related Investments. Readers may know that for many years now there have been fairly strict limits on the amounts that a pension scheme can invest in the business of its sponsoring employers. In very simple terms, no more than 5% of the fund can be invested and there are complete bans on things like providing bank guarantees to the company.

There is a very good reason for these limitations – essentially to prevent ‘putting all your eggs in one basket’ as it were. Way back in the mists of time, the pensions of whole swathes of workers were wiped out when the trustees unwisely made excessive loans to keep the sponsoring employer afloat, (for the seemingly logical reason that it’s better to have a job which provides a pension scheme than no job at all) only to see the whole thing come crashing down when the employer inevitably went belly up meaning not only was there no job, but there was no money in the pension scheme left either. Today of course we have the PPF but that’s another blog entirely.

But that was then and this is now and we have seen an explosion in rather more complex and imaginative investment vehicles coming on stream  including pooled type investments such as unit trusts and other collective investment schemes. In addition, the industry is having to come up with some exotic ways of meeting funding shortfalls as the regulator uses its muscles to require stricter funding mechanisms which again has led to complex debt for equity swap deals (where the trustees effectively take over the business and give up any further claims on the company in return) such as in the Uniq case.

This has led tPR to think a bit more deeply about ERI and remind schemes and employers that they might need detailed legal and other advice when considering such investments and expects ‘an alternative funding structure’ to be provided as a fallback position.  Even cash of equivalent value would do…presumably it didn’t occur to TPR that if cash was that readily available it might have been offered already but we’ll let that pass for now. While acknowledging that it may be ‘difficult’ for trustees to track investments underlying pooled investment vehicles such as collective investment schemes, nevertheless it expects trustees to monitor these indirect investments ‘in a reasonable and proportionate way’ So that’s all right then.

If ever there was a proof that no one at TPR has ever actually run a pension scheme, this is it.

Well back from my holidays and time to catch up with what’s been happening in the wacky world of pensions! The ‘honeymoon’ period of our current Coalition Government seems well and truly over and as we approach Conference season, the militants are flexing their muscles. Despite a new offer to their members, the BBC pension arrangements look set to provoke a strike by members of Unite and BECTU leading to the blacking out of the Conservative Meetfest.

This will not be the only industrial action over pensions I suspect. The TUC has said that public sector pension reform is in meltdown and has become a ‘critical issue amongst unions’. While I have on other fora called for more active involvement by citizens regarding their pension arrangements, this was not exactly what I had in mind I confess. Witholding labour that leads to further financial difficulties for one’s employer is not frankly the best way to find a solution in the current economic climate. Mind you, the BBC deserves a good kicking but for entirely other reasons!!

As I write this, the Work and Pensions Select Committee is due to meet to discuss the 2012 reforms. We expect that Auto Enrolment will remain but perhaps with some modifications so that a window before enrolment will apply rather than immediate on employment. NEST will essentially remain as is – more’s the pity – if anything needed a radical rethink that was it – but yet again, a government may have chosen to ignore the well argued comments of those in the industry in favour of some ‘policy adviser’ who has never been involved with the actual running of a pension scheme in their lives but is great at getting appointed to government think tanks.

But perhaps the most worrying news item of the week is research from Baring Asset Management which has revealed that 47% of women who are not retired do not have a pension. The total number of women who have yet to retire without a pension is increasing year-on-year, and clearly more needs to be done to ensure that women do not end up retiring in poverty and dependent on State benefits (which of course, they probably won’t actually get since NEST will take them out of means tested benefits and the State pension will be worth the price of a lettuce leaf-) oops!

One of the most amusing stories that has arisen in the past week (although it has a serious purpose) is the proposal that Diageo, the drinks conglomerate has come up with to try and solve its Final Salary Scheme funding deficit. As readers may know, when an actuarial valuation reveals a deficit, the law requires that the Trustees and the Employer get together to try to agree a cunning scheme to repair that deficit over a period of time. This is called a Recovery Plan.

Now the usual way of doing this is by (for example) the employer putting in additional cash sums or contributions. Or it may put up some property as collateral or put in place a Guarantee. But Diageo has come up with a somewhat unique offer. It is handing over 2.5 million barrels of booze to the scheme Trustees. At the end of 15 years, the scheme must sell this back to Diageo for an amount expected to be “no greater than the deficit at that time”, which is estimated to be up to a maximum of £430m. The deal will generate an income to the UK Scheme of about £25m each year over the 15 years. While it’s true that this is no different from any other offering of property (as collateral) it should certainly help make the Trustees meetings go with a swing!!

All of which led me to wonder just what other assets companies might consider using in these circumstances. If you’ve got any ideas, just let me know!! No prizes for the funniest I’m afraid but it might cheer us all up over the Summer!!

Although it is really something of a statement of the bleedin’ obvious, PwC have recently issued a report which after extensive (and no doubt extremely expensive) research has concluded that Final Salary Pension Schemes will have ceased to exist within 10 years. This is not exactly ground breaking news to those of us within the Pension Industry who have been watching the death throes for several years now.

It does seem however that the pace of change is escalating and frankly this is no surprise either given current economic circumstances, the open ended cost and volatility of running such schemes and the legislative complexity of complying with the over burdensome regulatory regime.  (Oh and Obama’s ridiculous grandstanding over BP significantly reducing the value of our pension funds – when he clears up Bhopal he might just have the moral high ground!!) And that’s before one factors in increasing longevity of members (in other words, we’re all living too long for the actuaries to keep up) and the soon to be introduced reforms in 2012 (I say this with some caution since it is just remotely possible that NEST will be spiked as many of us in the Pension Industry hope…at least in its current form)

But the one area that the report flags up which should be of concern is the fact that employees are simply not saving enough for retirement. 60% of people won’t be able to retire at all due to lack of savings. Yet the previous Government (and this one too if they don’t do something about it) think that an 8% contribution into a monolithic money purchase scheme will be sufficient. Actually the figure that will be invested will be a mere 5.7% after the set up levy and management charges are taken off. Here’s a bit of advice that didn’t take a lot of research – IT ISN’T ENOUGH!!

It is no wonder that employers are incentivising their employees to transfer out of the DB arrangement into something less costly. Someone needs to get a grip of the Pension arena. Who will be brave enough to do it I wonder?

This weeks’ items – another massive bailout (potentially) and a oopsie by a pension industry ‘good guy’

First, the Coalition Government has announced it’s intention to sell off part of the Royal Mail. So far so predictable. The kicker in this particular tale is that the Royal Mail is currently sitting on an £8BILLION (yes you read that correctly, £8 BILLION!!!) deficit and that’s just what’s been revealed in the company accounts. The Actuarial Valuation results due soon are expected to show an even bigger deficit. This will not ordinarily make it a particularly attractive proposition for any potential buyer.

But wait…everything is fine…the British taxpayer is going to pick up the tab…again. While the Government has said that it will seek the injection of private capital the chances are that this will fail as it did last year when an attempt was made to sell part of it off.  St Vince of Cable has indicated that the Government (that’s actually you and me to be honest) will take on the pension liabilites to make it more of a viable proposition for a buyer. We already have a gaping big hole in our national finances. What’s another £8 billion between friends? I would just love to see the PPF cope with this scheme!!

The second story this week concerns a claim by a former senior employee of the Pensions Advisory Service (TPAS) that the organisation discriminated against him on the grounds of age by sacking him before a restructuring exercise comes into effect, in an effort to avoid making him redundant just before he retired thus avoiding paying him compensation under a Civil Service compensation scheme. I don’t want to go into the rights and wrongs here. It’s not my place. But you would think wouldn’t you that an organisation like TPAS would have taken advice not from a lawyer (their decision may well have been LEGALLY watertight) but from a PR Guru who would almost certainly have told them that
bad press on something like age discrimination was bound to lead to adverse comment from bloggers and the industry alike!! Common Sense guys. Trumps economics every time!!

Been a bit quiet on the pension front this week – must be something to do with some vote thingy going on in the country. Pensions seem pretty low on the politicians agenda (it’s that ‘too difficult’ basket again) so I thought this week I’d actually blog about a bit of law (shock horror!!)

The Outer House Court of Session (it’s a Scottish court for all you Sassenachs) has put the boot into the English once again over of all things, the equalisation of pension rights in schemes.

For those of my readers who may not be pension experts, a little reminder. Since 17 May 1990 and the Barber decision in the European Court of Justice, men and women have had equal pension benefits applied to them. The decision (and various subsequent and refining judgements) have said that the disadvantaged sex must be given the same rights as the advantaged sex unless and until schemes were amended to ‘level down’ all the benefits equally. Typically this meant that men who had a Normal Retirement Age of 65 would be able to take any benefits that accrued to them after 17 May 1990 at age 60 – the NRD for women – without any actuarial reduction for early payment. However schemes could be amended to make NRD 65 for both sexes. The period between 17 May 1990 and the amendment date is called the Barber Window.

Still with me – jolly good! Now, many schemes got very worried by the Barber window and sought to close it as soon as possible. Unfortunately this was often acheived without too much attention being paid to the strict amendment powers of the scheme rules. The English courts have considered this and have said, most notably in the Trustee Solutions v Dubery case, that unless the amendment requirements were strictly adhered to (for example if it required amendment by Deed, a scrappy piece of paper calling itself an Announcement just wouldn’t do) then the amendment was not valid and the Barber window remained open. Much wailing and gnashing of teeth as schemes already in deficit suddenly faced a liability for which they hadn’t properly funded!

Now our friends North of the Border have put something of a coach and horses through that principle in a case called Low and Bonnar v Mercer Limited. Lord Drummond Young (for it was he) has declared that the Scottish language is somewhat different to that of English and the word ‘Deed’ did not mean quite the same thing and had no techincal meaning in Scottish law. Consequently if a scheme required an amendment to be by Deed in Scotland, that could in fact merely imply some form of formal writing such as a Board Minute. Well, lots of rejoicing in Edinburgh and Glasgow then but not much comfort for us in the South where equalisation remains one of the thorniest problems we pension lawyers are having to deal with.

It’s enough to drive one to drink…Mine’s a good single Malt…

So, Readers Digest (or rather the pension scheme of course) has now entered the PPF Assessment process as was almost inevitable following the calling in of the Administrators in February. Readers of my blog will know that RD had been in discussion with the PPF prior to this in relation to its multi million pound deficit and came a cropper when TPR refused to accept a negotiated deal that would have seen an innovative resolution including a significant cash injection and a large equity stake in the US parent company being taken by the scheme trustees.

This was not TPR’s most glorious hour (frankly they’ve not had a glorious hour for a long while now). The publishing interests of Readers Digest itself has now been bought by a private equity company but they will not take on any liability for the pension fund.
Instead, this will be left in the shell of the old RD with TPR now in the unenviable position of considering how the £125m liability can be satisfied. Let’s not forget that TPR has a statutory duty to protect the PPF which will now be picking up the tab. For those of my readers familiar with Twitter speak, we would call this #fail!!

Even if TPR can use it’s powers to call in a Financial Support direction, this will fall on the US parent. And we all know how successful TPR has been when trying to get Overseas companies to pay up under an FD. Again for the Twitteratis amongst you – Nortel#Fail!!

Sometimes, its not just what you know…it’s who. The Pension Regulator has just found this out having been sent off with a flea in its ear by both the US and Canadian Courts in its attempts to enter the ‘world domination’ market by thinking – completely wrongly as it turns out – that it had jurisdiction in those countries.

The background is it’s attempt to make the overseas parent companies of the Nortel UK Pension Schemes to pay an additional contribution to cover the significant deficit. The US and Canadian courts have given permission for the overseas parent to ‘ignore’ the demand for £2.1 billion. Nortel is bankrupt by the way.

So what possible sense would it make to pursue a ‘man of straw’ and what advice did tPR have to suggest that pursuing a dead duck was a great idea? Presumably the same adviser who said that going up against Readers Digest was going to result in a saving to the PPF too. Time for better advice I think – actually better  yet, time for a different regulator.

In a mid week update to my Monday posting, Readers Digest has just announnced it is going into administration in the UK due to the size of the DB pension scheme deficit.

What seems to be most interesting in this case is that the parent company seems to have been in negotiation with the Pension Protection Fund about making payments to the scheme (presumably to ensure that the compromise it was contemplating would not prevent entry to the PPF should it be necessary). However, this ‘agreement’ did not meet whatever stringent test the Pension Regulator had in mind. Result – RD goes bust and the scheme probably ends up in the PPF anyway. Well done tPR – way to go!!

NB – The Pension Regulator has a statutory duty to ensure schemes do not fall into the PPF if at all possible. I think we can assume that on this one at least, it failed miserably.