News - Midlands
Stewart Towe This whole issue couldn't be more topical for us as we have just frozen our final salary scheme after a major consultation process with our 400-strong workforce. Historically the scheme earned 8 to 12 per cent a year over a 30-year period.
New legislation, particularly over the last three years, means that because such a substantial part of the fund has to be held in fixed interest securities, that effectively means government bonds. Yet the government have been paying only 3 per cent while final salaries are increasing by nearer 4 per cent. That created a real issue for us.
Theoretically the money you need in the fund is huge and completely unrealistic and that leaves you with a theoretical pension hole. When you have such a difference between what your pension scheme can earn and what final salaries are increasing by, you cannot afford to run the fund. We could only see the hole getting bigger. As a responsible company you cannot ignore the problem.
The closure of our final salary scheme has taken three months. In reality we probably should have closed the fund three years ago. However, we kind of hoped some sense would come legally to free things up. We have not closed it and said 'there is a big hole so tough'. What we have said is that there is a theoretical hole there at the moment. Over-intensive legislation creates a situation where it is impossible to continue as you are.
John Grant I couldn't agree more. Our group inherited a defined benefit scheme four years ago and one that was fully funded. The issue for us being a venture capital-backed group is that it's our intention to exit these businesses in the next few years. As such the issue of pensions definitely looms large in our thinking. Can we pass the defined benefit schemes on?
A big issue surrounds Section 75 debt where when one company leaves a scheme you are required to top up the scheme. Under current legislation the deficit is collected on a MFR (minimum funding requirement) basis. New legislation says you will collect it on a wind-up basis. If say the deficit on a MFR basis is £31m, the deficit on a wind-up basis is typically £325m.
Mike Surrey This will have a major impact on the level of corporate transactions. If you look at the history of our company GEC/Marconi did a large number of acquisitions over a 20-year period or so.
Because of that timeframe what we have ended up with is a majority of members already of pensionable age and only a small percentage who are left working in the industry and where the funding requirement is now met by a small telecoms company rather than a huge industrial company. We were very fortunate that with our bigger transactions on the disposal side the pensioners went with the company.
Howard Marshall The essential problem here is that the government is trying to de-risk pensions, which is impossible. You cannot take the risk out of pensions.
Grant By trying to de-risk it you actually create more problems.
What has been the direct impact of pension issues on corporate activity?
Ian Tetsill There is no doubt that the pensions issue makes potential buyers of businesses more nervous, and also makes trustees of schemes more nervous. You only have to look at how the pensions issue prompted the collapse of Permira's bid for WHSmith, for instance.
Richard Rendle The impact on deals is wide ranging. For instance the new Pensions Regulator has to decide what level of gearing is generally acceptable on a deal. What is the impact of that? Well, you will basically have directors asking themselves: "Can we sell this business when we have a pension scheme deficit?"
John Connolly Once you gear a business it will be in a worse position in terms of available cash too, which only adds to the lack of certainty. As a backer of businesses you have to ask what you are getting for your money in pounds, shilling and pence. You look at the final salary scheme and you know that if the deficit is X on a MFR basis, it will be two or three times X on breaking up the business. No one will take on that responsibility you would be mad. The essential problem at the moment is that we don't know how the legislation will be interpreted. There is double uncertainty circling around.
Mike Ward The basic issue with all this is that the UK has never had this type of economy for so long where we have had relative stability with low interest rates for so long. Pensions funds were not designed for this type of economy. It is a structural issue with final salary schemes. No one had to address this issue in the early days. Added to that we are all living longer and putting more pressure on the system.
Robin Ellison What has really changed is that the government has changed the deal. The government has not had the strength, will or character to stand back and see what the real danger is. They are living in a dream world that there is nothing wrong yet just around this very table there is doom and despair.
You cannot have a situation where venture capitalists (VCs) and bankers etc looking at an exit from a business are personally liable over something they cannot control. You cannot have corporate transactions coming to a halt just because of defined benefit schemes. The sad thing is we have all let this happen, everyone in the business community.
The question now is can we kill this regulatory framework? We all have to say something. We all have to whinge like mad in the right places. Otherwise the prospects are unclear. For instance I have even heard of companies looking at deregistering their pension schemes and setting them up in other countries to avoid UK regulations.
Marshall Surely the great hidden agenda here is making the pensionable age 70. You just don't hear anyone come out and say it.
Rendle Personal liability is a big issue too. People have not picked up on it; it really hasn't come home. One wonders what it will take for it to come home.
Ellison Going back to my earlier point about making a stand it is disappointing that up until now people haven't been working collectively. For instance ourselves, the chambers, CBI and Institute of Directors should be talking more for instance. As I said, this is serious. All VCs are potentially insolvent because of pension deficits in their portfolios.
Moahammed Hasan I think it is dawning on people now. We recently did a major study of members in this region and the pensions issue came up time and again as a major issue for them. I am tempted to ask whether all this legislation is simply a smokescreen to compulsion by stealth?
And yet this is precisely the one area where the government shouldn't be doing anything. To take the risk out of pensions doesn't make sense. You cannot say that risk is bad. The regulation we have inherited has to be rolled back.
If you talk to the vast majority of our members, people in businesses turning over anything between £320m and £3500m, they are saying it is a real priority for them. There has to be a very simple message given to government. The government has to be led by industry.
Ellison That all said I accept that you cannot have people coming out of pension schemes with nothing. That is clearly not right. Instead we have to find a middle ground where people are not screwed and company schemes are not wiped out.
Surrey I agree; you have to find a fair way. Part of the problem is that all the issues have come together. We have to navigate a way through. I think we should learn from abroad, particularly the US where there is a level of protection for pension funds which gets the balance about right. We have to find a 40-page answer rather than a 400-page one.
Mike, it couldn't be more topical for you to be here today given reports this week that your firm's likely sale following the loss of the BT contract will be affected by your pension deficit. Can you clarify the position?
Surrey The hard facts, which have been ignored in much of the media coverage, are that our pension scheme has £32.5bn of assets in the fund, which currently stands at £3139m in deficit. However, will that deficit have an impact on any corporate transaction we may do now in terms of a trade sale? The answer is yes, without doubt.
Paul Bennett A major consideration we haven't touched on is that half of people under 30 make no pension provision and pensions are simply not a relevant issue for them.
Ward We haven't even touched either on the impact on the public sector. The government has the same endemic problem that we all have with civil servants living longer too.
Bennett I've read that the public sector accounts for 18 per cent of the workforce yet 36 per cent of pension liabilities.
Towe If final salary schemes are not sustainable for the private sector then they should not be sustainable for the public sector either.
Bennett Historically directors dictate mergers and acquisitions (M & A) policy. Yet now trustees of pension funds are having more influence over a company's M&A policy, particularly of course where directors themselves are trustees too.
Connolly If you back a business with a final salary scheme you want to know how trustees are going to react. Would we buy a business with a final salary scheme? We would be very, very wary. You would certainly be talking to the trustees before you did any deal. I have seen deals where there has been heated discussion with pension trustees.
Trustees are usually members of the scheme themselves and do not want to see companies going pop. When it comes to doing a deal, you are really relying on people's basic common sense in all this in order to find a way through.
Jane Bleach It cannot be in anyone's interests to bring a company down. But trustees have to do something that often goes against common sense. The trustees will often say that the protection of jobs is one of the key drivers behind their decision and you cannot argue with that.
Rendle The result of all this is that it will stifle corporate activity until someone gets hit really hard with a personal liability and it makes everyone stand up and take notice.
Ward Instead of causing problems, the government needs to be finding solutions.
Wrecking the deal
Stewart Towe This whole issue couldn't be more topical for us as we have just frozen our final salary scheme after a major consultation process with our 400-strong workforce. Historically the scheme earned 8 to 12 per cent a year over a 30-year period.
New legislation, particularly over the last three years, means that because such a substantial part of the fund has to be held in fixed interest securities, that effectively means government bonds. Yet the government have been paying only 3 per cent while final salaries are increasing by nearer 4 per cent. That created a real issue for us.
Theoretically the money you need in the fund is huge and completely unrealistic and that leaves you with a theoretical pension hole. When you have such a difference between what your pension scheme can earn and what final salaries are increasing by, you cannot afford to run the fund. We could only see the hole getting bigger. As a responsible company you cannot ignore the problem.
The closure of our final salary scheme has taken three months. In reality we probably should have closed the fund three years ago. However, we kind of hoped some sense would come legally to free things up. We have not closed it and said 'there is a big hole so tough'. What we have said is that there is a theoretical hole there at the moment. Over-intensive legislation creates a situation where it is impossible to continue as you are.
John Grant I couldn't agree more. Our group inherited a defined benefit scheme four years ago and one that was fully funded. The issue for us being a venture capital-backed group is that it's our intention to exit these businesses in the next few years. As such the issue of pensions definitely looms large in our thinking. Can we pass the defined benefit schemes on?
A big issue surrounds Section 75 debt where when one company leaves a scheme you are required to top up the scheme. Under current legislation the deficit is collected on a MFR (minimum funding requirement) basis. New legislation says you will collect it on a wind-up basis. If say the deficit on a MFR basis is £31m, the deficit on a wind-up basis is typically £325m.
Mike Surrey This will have a major impact on the level of corporate transactions. If you look at the history of our company GEC/Marconi did a large number of acquisitions over a 20-year period or so.
Because of that timeframe what we have ended up with is a majority of members already of pensionable age and only a small percentage who are left working in the industry and where the funding requirement is now met by a small telecoms company rather than a huge industrial company. We were very fortunate that with our bigger transactions on the disposal side the pensioners went with the company.
Howard Marshall The essential problem here is that the government is trying to de-risk pensions, which is impossible. You cannot take the risk out of pensions.
Grant By trying to de-risk it you actually create more problems.
What has been the direct impact of pension issues on corporate activity?
Ian Tetsill There is no doubt that the pensions issue makes potential buyers of businesses more nervous, and also makes trustees of schemes more nervous. You only have to look at how the pensions issue prompted the collapse of Permira's bid for WHSmith, for instance.
Richard Rendle The impact on deals is wide ranging. For instance the new Pensions Regulator has to decide what level of gearing is generally acceptable on a deal. What is the impact of that? Well, you will basically have directors asking themselves: "Can we sell this business when we have a pension scheme deficit?"
John Connolly Once you gear a business it will be in a worse position in terms of available cash too, which only adds to the lack of certainty. As a backer of businesses you have to ask what you are getting for your money in pounds, shilling and pence. You look at the final salary scheme and you know that if the deficit is X on a MFR basis, it will be two or three times X on breaking up the business. No one will take on that responsibility you would be mad. The essential problem at the moment is that we don't know how the legislation will be interpreted. There is double uncertainty circling around.
Mike Ward The basic issue with all this is that the UK has never had this type of economy for so long where we have had relative stability with low interest rates for so long. Pensions funds were not designed for this type of economy. It is a structural issue with final salary schemes. No one had to address this issue in the early days. Added to that we are all living longer and putting more pressure on the system.
Robin Ellison What has really changed is that the government has changed the deal. The government has not had the strength, will or character to stand back and see what the real danger is. They are living in a dream world that there is nothing wrong yet just around this very table there is doom and despair.
You cannot have a situation where venture capitalists (VCs) and bankers etc looking at an exit from a business are personally liable over something they cannot control. You cannot have corporate transactions coming to a halt just because of defined benefit schemes. The sad thing is we have all let this happen, everyone in the business community.
The question now is can we kill this regulatory framework? We all have to say something. We all have to whinge like mad in the right places. Otherwise the prospects are unclear. For instance I have even heard of companies looking at deregistering their pension schemes and setting them up in other countries to avoid UK regulations.
Marshall Surely the great hidden agenda here is making the pensionable age 70. You just don't hear anyone come out and say it.
Rendle Personal liability is a big issue too. People have not picked up on it; it really hasn't come home. One wonders what it will take for it to come home.
Ellison Going back to my earlier point about making a stand it is disappointing that up until now people haven't been working collectively. For instance ourselves, the chambers, CBI and Institute of Directors should be talking more for instance. As I said, this is serious. All VCs are potentially insolvent because of pension deficits in their portfolios.
Moahammed Hasan I think it is dawning on people now. We recently did a major study of members in this region and the pensions issue came up time and again as a major issue for them. I am tempted to ask whether all this legislation is simply a smokescreen to compulsion by stealth?
And yet this is precisely the one area where the government shouldn't be doing anything. To take the risk out of pensions doesn't make sense. You cannot say that risk is bad. The regulation we have inherited has to be rolled back.
If you talk to the vast majority of our members, people in businesses turning over anything between £320m and £3500m, they are saying it is a real priority for them. There has to be a very simple message given to government. The government has to be led by industry.
Ellison That all said I accept that you cannot have people coming out of pension schemes with nothing. That is clearly not right. Instead we have to find a middle ground where people are not screwed and company schemes are not wiped out.
Surrey I agree; you have to find a fair way. Part of the problem is that all the issues have come together. We have to navigate a way through. I think we should learn from abroad, particularly the US where there is a level of protection for pension funds which gets the balance about right. We have to find a 40-page answer rather than a 400-page one.
Mike, it couldn't be more topical for you to be here today given reports this week that your firm's likely sale following the loss of the BT contract will be affected by your pension deficit. Can you clarify the position?
Surrey The hard facts, which have been ignored in much of the media coverage, are that our pension scheme has £32.5bn of assets in the fund, which currently stands at £3139m in deficit. However, will that deficit have an impact on any corporate transaction we may do now in terms of a trade sale? The answer is yes, without doubt.
Paul Bennett A major consideration we haven't touched on is that half of people under 30 make no pension provision and pensions are simply not a relevant issue for them.
Ward We haven't even touched either on the impact on the public sector. The government has the same endemic problem that we all have with civil servants living longer too.
Bennett I've read that the public sector accounts for 18 per cent of the workforce yet 36 per cent of pension liabilities.
Towe If final salary schemes are not sustainable for the private sector then they should not be sustainable for the public sector either.
Bennett Historically directors dictate mergers and acquisitions (M & A) policy. Yet now trustees of pension funds are having more influence over a company's M&A policy, particularly of course where directors themselves are trustees too.
Connolly If you back a business with a final salary scheme you want to know how trustees are going to react. Would we buy a business with a final salary scheme? We would be very, very wary. You would certainly be talking to the trustees before you did any deal. I have seen deals where there has been heated discussion with pension trustees.
Trustees are usually members of the scheme themselves and do not want to see companies going pop. When it comes to doing a deal, you are really relying on people's basic common sense in all this in order to find a way through.
Jane Bleach It cannot be in anyone's interests to bring a company down. But trustees have to do something that often goes against common sense. The trustees will often say that the protection of jobs is one of the key drivers behind their decision and you cannot argue with that.
Rendle The result of all this is that it will stifle corporate activity until someone gets hit really hard with a personal liability and it makes everyone stand up and take notice.
Ward Instead of causing problems, the government needs to be finding solutions.