In pursuit of a sound-bite

When did being a company automatically make you evil?






I'll sidestep, for a moment, the local figure of hate: Tesco in favour of another example.

This evening's "Any Questions" on R4 turned its attention to the public sector industrial action this week and discussed whether it was reasonable to strike because of an enforced change in people's pensions.

The commentators included Billy Bragg who - and I'm paraphrasing now - indicated that private sector workers should be asking after their pensions too since their employers took funding holidays for years thereby boosting their profits at the expense of their employees' future well-being.

I guess Mr Bragg is talking about the pension glory-days of the 1980's and 90's

I can't claim to be a pension expert but in the 1980's I was busily running Final Salary Pension schemes for my employer.

It's true, many funds did have funding holidays but they didn't general do it for fun - they did it because the law changed.
This particular change reduced the funding margin that pension funds were allowed to run.

Prior to this change there was a really good incentive to heavily over-fund the pension scheme. The tax regime was such that an employer could count their pension contributions as allowable business expense and any increase in the value of the fund was tax free.
This sounds good, no?
A really good way to secure the future income for your employees and Inland Revenue blessing to do so.

Except that this was abused - you're shocked, aren't you?

A number of unscrupulous companies busily squirrelled away vast funds in the pension scheme for a number of years, making use of the tax incentives and the favourable ecomonic climate. After a few years, they liquidated the companies, laid off their employees after securing the absolute minimum paid up pension for them and swiped the rest of the pension fund. OK, the disbursement of the fund was then subject to tax but it still proved to be a good money spinner for them.
All this was perfectly legal.

At the time there was other legislation in place that made company pension schemes far from perfect in some cases...

There was the ability - possibly encouragement - to make the joining of the company pension scheme compulsory. So if the benefits that it provided were sub-standard (but legal) an employee could find themselves hobbled in a scheme that wouldn't really provide for the future.

At the time there were no such things as personal pensions, or stakeholder pensions so employees' choices were heavily limited anyway.

All this changed in the latter part of the 80's with so-called "Fowler" pensions legislation. Compulsion to join the company retirement plan was removed and individual pensions came into being, and were blessed with a favourable tax regime.

The idea was not to encourage people out of good pension schemes but to give them the option to set up their own where they didn't expect to be with an employer for very long, or when the company plan wasn't very good or where there was no company pension scheme.

Around the same time, the allowable funding margins were tightened to reduce the incentive for unscrupulous companies misbehaving.

What happened? Companies had to stop paying into pension schemes to reduce the over-funding because removing the excess from the fund would have lead to them being heavily taxed on the money removed, only for them have to reinvest eventually anyway.

Now pension providers turned their attention to sexy new personal pension products. There was a large population of un-pensioned people out there. So in order to encourage salesfolk to sell the new individual plans to a new audience rather than encourage the churning around the market of existing occupational plans they made the commission on these new arrangement very attractive.

What happened? The pensions mis-selling scandal, that's what. Instead of targeting the individual plans at the uninsured they applied a scatter-gun approach and sold to anyone and everyone.

So much for the pensions regime for a moment...let's come back to the evil that is the Corporation.

The second half of Mr Bragg's statement was that the evil coporporation took the reduction in the pension contribution to their "bottom line". Ummm...well, that's what companies are there to do. Make a profit. Actually, public limited companies have an obligation to their shareholders to maximise the return on their shares.

Now I can hear you saying that shareholders are also evil capitalists who are only there to screw the poor downtrodden worker into the ground.

I need you to come out of your Dickensian nay-saying for a second.

Who are the major shareholders in public limited companies? Large-scale investors...such as insurance companies, banks and pension funds.

So if you're wanting good levels of return on your building society account, or your unit-linked pension to provide you with a good income when you retire, or your Open Ended Investment Contract to return sufficient dividends to pay off your interest-only mortgage then you have a vested interest in PLCs making a profit.

Only when these companies make a profit can they declare a dividend on the shares you effectively own in them thereby paying you for the use of your money.

You see what I'm getting at?

I'm not for a second saying that the financial regime is perfect - it's not. It never has been. Each change in legislation removes some of the abuse at the expense of introducing some other abuse.

What I'm saying is that financial issues, like economics as a whole, can't be condensed into a couple of simple headlines.

As for Tesco - I'm not a big fan. I seldom shop there but them being good at turning a profit - providing they act within the law - is what they're there to do. And there's a reasonable chance that quite a few people reading this, as well as some of the people who protest against them, are financially better off because of this.

So please, Mr Bragg, stick to being a reasonable singer-songwriter...and leave the pensions to someone else, eh?