Jeremy Warner's Outlook: Actuaries put to shame as staying in equities saves BT pension scheme from catastrophe
Productivity: don't blame planning laws; Insider trading: an intractable problem
Tuesday 19 December 2006
British Telecom (BT) was virtually bust five years ago, having massively over-extended itself in the madness of the dotcom boom. Only a fire sale of assets and a rescue rights issue saved the company from oblivion. What was not properly appreciated at that time, however, was that the company's pension fund members were potentially in as perilous a position as the shareholders.
Had the City not coughed up, they would have lost their sponsoring company and the pensions they would be receiving today would be a pale shadow of the full pension promise BT is now able to deliver. Whether the Crown Guarantee, given to BT at the time of privatisation in relation to its pension liabilities, would have protected them is open to question, and, in any case, it would only have applied to those who joined the scheme prior to 1984. Tens of thousands of employees would have been left out of pocket.
Yesterday BT announced proposals which it hopes will finally exorcise the pensions issue. They do not come cheap. BT has agreed to pay £2.8bn in extra contributions over ten years, £840m of which will be paid upfront over the next 12 months. If investment returns exceed 3.2 per cent real per annum, the company stands to claw some of this back but, by the same token, it will have to pay even more if the rate of return comes in at less.
In point of fact, this is actually only a slightly better deal for pension fund members than was originally agreed three years ago, or rather, it is basically the same level of funding but over an accelerated time frame. None the less, it's cash flow that could otherwise have been devoted to other things, including capital returns to investors.
Given the existence of the Crown Guarantee, does BT really need to be so generous? The guarantee is in truth something of a red herring, a legal curiosity which can only be called on if the company goes bust. It might mean something if you think directors are again likely to run the enterprise into the ground. Yet any company which plans to be around for the next 50 years needs to ensure it is in a position to meet its pension liabilities.
Throughout the 1980s and 1990s, these were swept under the carpet by most companies. And, in nearly all cases, the pension liability was kept off balance sheet. Assessment of what it might be also tended to be based on wildly over-optimistic assumptions as to likely investment returns and virtually no appreciation of improving life expectancy. These variables plainly make quite a difference. Only after the bear market began in March 2000 were actuaries dragged kicking and screaming into adopting a more realistic approach.
Yet even then, if yesterday's announcement from BT is anything to go by, they were less than honest with themselves. The latest triennial funding valuation shows a deficit of £3.4bn as at the end of last year, which compares to £2.1bn three years previously. Since then, however, equity valuations have recovered massively. The reason the deficit is higher is that the actuaries have adopted a more realistic approach on longevity - people are living a lot longer - and been more conservative in their assumptions about investment returns. Under the old assumptions, the scheme would today be substantially in surplus.
Back then, with the future still uncertain, it very much suited directors to be economical with the actualité. In today's more solvent environment, with the company again an investors' favourite, BT can afford to tell it as it is.
Yet in their past attempts to ignore an awkward truth, at least they got one thing right. Out of necessity more than choice, trustees of the BT pension fund stayed in equities, a strategy which thanks to the bounce back in stock markets has helped massively reduce the gap between assets and liabilities since then.
Had they crystallised the deficit as it then was by following the investment fashion of the time and switching from equities to bonds, they might today be staring the use of that fabled Crown Guarantee in the face. The present renaissance in BT's affairs might not have taken place at all, so overwhelming would have been the extent of the pensions problem. Hey ho.
Productivity: don't blame planning laws
Published at the time of the pre-Budget report a couple of weeks back, the Barker Review of Land Use Planning is a weighty tome which you'll forgive me for only just having got round to reading. Most of its findings and recommendations are uncontentious enough. The planning regime in Britain has long and rightly been seen as an unnecessarily complex hindrance to commercial and infrastructure development.
However, most of it is also there for an entirely legitimate purpose - the protection of local community and environmental interests. To sweep large elements of it away in pursuit of the Chancellor's holy grail of improving Britain's productivity record may not be as unarguably desirable as Kate Barker, the author, and her supporters in the Treasury, like to pretend.
Two key recommendations give particular cause for concern. One is the removal of the present requirement to demonstrate the need for development. The other is the related recommendation to remove minor commercial developments that have little wider impact from planning procedures. These might seem innocuous enough suggestions but the impact on many communities could be potentially catastrophic.
Consider, for instance, the development of a new hypermarket on the town bypass. There would be no requirement under these proposals to consider the "need" for such a monstrosity. The economic benefits of a more efficient supply chain and lower prices could on the other hand be easily demonstrated. Yet the damage to the town is likely to be profound in terms of the destruction of town-centre retailing, community cohesion and extra traffic congestion as everyone jumps in their cars to visit the new hypermarket.
In its pursuit of improved productivity goals, the Treasury seems entirely to have forgotten that economic wellbeing is not just about business efficiency. If the market is allowed unencumbered to decide when and where to develop, there will be an immediate uplift in productivity and growth. The social and environmental costs of such a free-for-all are more difficult to measure, but they may more than outweigh these gains.
The more recent cause of Britain's poor productivity record is not, in any case, planning restrictions on private enterprise, but the exponential growth of the public sector. Unrestrained by the disciplines of the capital markets, productivity in the public sector has if anything been going backwards as the number of tax-funded job creation schemes multiply.
Smaller government is likely to do a lot more to improve Britain's productivity record than depriving local communities of their say on the need for development. If the Government's productivity were measured in the number of reviews it commissions, it would win the argument hands down. Yet an examination of the mote in the Government's own eye is the one review we can be sure will never be ordered.
Insider trading: an intractable problem
Insider dealing is the crime that dares not speak its name. Everyone knows it is still rife in the City, but law enforcers and regulators seem incapable of doing anything about it. Successful prosecutions, either through the courts or the FSA's less demanding market abuse regime, remain rare.
Now the FSA is conducting what it delicately refers to as a "thematic review" of at least four bid situations in the past year where the information is known to have leaked. Everyone involved is to be grilled in the search for where systems are breaking down. Is the FSA about to strike gold in the war against market abuse? Don't hold your breath.
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