View from City Road: Pragmatic thinking on pension fund rights

'It was just a wonderful period; it will be looked back on in history as the Golden Era,' according to an anonymous actuary, commenting in the Goode report on the pension fund surpluses of the 1980s.

Investment values soared as the markets boomed. There were large cuts in company workforces, so those left behind were well cared for. Meanwhile, tax changes in 1986 forced funds to reduce their surpluses over a five-year period, whether through cash repayments to the company, contribution holidays or improved benefits.

This in turn encouraged people to think of what until then had been regarded as highly theoretical actuarial calculations as a real asset available to share around. The result was some celebrated court cases, such as the fight over Imperial Tobacco's fund after the Hanson takeover.

Some finance directors still claim surpluses belong entirely to the company, which is as misleading as saying they belong entirely to the workforce. In a funded scheme the employers bear the full liability for shortfalls but employees also bear a significant risk that their pensions will fall below promised levels.

In practice, there is now a widespread recognition that the benefits of surpluses should be shared, so that when companies take contribution holidays they must be accompanied by improved pensions. And companies that want to plunder funds for cash are on the defensive.

What the Goode report has done is reinforce this pragmatic evolution of thinking, while basically accepting the employers' case that they have a greater claim than employees.

The report says the new Pensions Regulator should approve payments to employers - though the Occupational Pensions Board already has a key role - and it proposes changes to regulations on contribution holidays. The most important would be to loosen the 1986 tax rules on excess surpluses.

However, all this looks rather out of date since the pendulum is swinging from surpluses to deficits once again, as recession-hit investment returns lag behind liabilities. The most significant effect on companies could come from Goode's proposals for tougher rules on company payments into schemes in deficit.

But there is little reason for share prices to fall. The stock market already strips out pension effects when evaluating company results, whether they are surpluses or deficits, as the muted reaction to the end of BT's contribution holiday confirmed. And those companies that actually need to get their hands on surpluses have already been marked down for other reasons.