Drowning in deficit
The pensions crisis is far from over. Rachel Machin examines what the region's businesses can do to protect themselves from catastrophe and finds that the relationship with trustees holds the key.
It is 15 years since the body of tycoon Robert Maxwell was found in the Atlantic, but a recent TV drama depicting his downfall only served to highlight the problems with pensions that many companies still face.
The issue has also reared its ugly head again in the press - not that it ever went away - when the Confederation of British Industry (CBI) reacted angrily to a Treasury minister's claim it had lobbied for the tax change a decade ago - which was to scrap the dividend tax credit. Despite Chancellor Gordon Brown insisting his change to pension tax rules was the right decision, the Conservatives claim he took it after being warned it would cause a £375bn hole in pensions. Richard Black, pensions partner at law firm Wragge and Co, which has been appointed to advise the trustees of the Britannia Building Society Pension Scheme and AMEC's over £31bn scheme, says: "Events have moved strongly against companies.
The abolition of the tax credit by Gordon Brown didn't help at all, but the fall in the stock market and the fact that there's been a political regime where protection has been built in for members means it's now very difficult for companies to work through - how do they manage those liabilities going forward?" The figures certainly look stark for businesses.
There were 10.9 million pensioners in the UK in 2002.
But this figure will rise to 15 million by 2031, according to government figures.
Among the factors driving up the costs has been the increased longevity of the population and the need to make full contributions, after many years in which employers (and staff) enjoyed a partial or total contributions "holiday". The TUC has suggested that some companies were still taking pension holidays as late as 2002.
As well as reducing or stopping their pension contributions, some companies were also moving the surplus provided by the stock market boom out of pension funds and into their reported profits. Then, when the stock market crashed in 2000, the value of pension funds dropped from £3812bn to £3610bn and companies began to worry about the cost of their pension schemes. According to Mohammed Alam, of Birmingham-based law firm Hammonds, there is worse to come. "The radical pensions shake-up scheduled for 2012 is likely to have onerous financial and administrative implications and should be taken seriously," he says. "The proposals, put forward by the government in December 2006, are another attempt at increasing saving for retirement among low to moderate earners.
They include a system of personal accounts into which employees, employers and the government contribute. "This would hit employers' pockets hard at a time when most pension funds are already significantly under- funded.
The message to employers is clear: get a handle on your pension costs now as they are set to grow in the years to come." So what have companies in the region been doing to prevent the haemorrhaging of their pension funds? "In years gone by companies would have gone for the defined benefit scheme - it was a fashion for obvious reasons.
Over the last ten years there has been a move away - a lot of companies have been forced to close their defined benefit schemes," says Martin Rogers, managing partner at accountancy firm Mazars. "Older companies have been particularly affected, those that have been labour intensive.
Closing these schemes has been the only way to protect them - you can see that with the likes of Rover." Guy Mander, partner in restructuring and recovery at Baker Tilly, agrees: "Companies need to understand that debts will go on for a very long time.
There are about 10,000 defined benefit schemes out there and a number are managed at risk. "Defined benefit schemes were set up to reflect staff loyalty.
Now workforces are far more transient.
The Midlands is operating in mature markets with mature products.
A number of significant companies have downsized over time, which has left behind problems." If the gloomiest predictions come true, then 2007 will see more final-salary pension schemes closed, not only to new members, but increasingly to current ones as well. A survey by Aon Consulting, which provides risk management, shows that half of employers with defined benefit schemes could be closed to future accruals by 2011, trebling the number of sponsors that have already done so. But is there light at the end of the tunnel for the region's businesses? Deloitte has revealed that the total deficit for the final salary pension plans of the UK's top 100 companies is currently £321bn, the lowest deficit for more than five years. Rogers warns companies not to get carried away. "It could be a real danger for companies to think that just because the stock market is looking good, the problem has gone away.
It has only gone away for today," he says.
The downfall of big players like MG Rover, Firmin & Co and Golden Wonder in the Midlands has highlighted how vulnerable the old-style manufacturing businesses are to the perils of the pension crisis.
Over recent years, market conditions have forced many to downsize, leaving businesses with a smaller workforce, but an army of redundant workers to pay out to.
Jane Lodge, UK Manufacturing industry leader at Deloitte in Birmingham, believes that many smaller manufacturing businesses in the Midlands could face insolvency unless they take radical action to deal with their pension deficits.
According to recent figures from the Pensions Regulator and Pensions Protection Fund (PPF), UK manufacturers have £319bn of pension deficits, and it is smaller businesses who face the most precarious future.
Lodge says: "Unless this issue is addressed, the most likely outcome is that manufacturing companies may fold and their pension schemes will be taken over by the PPF.
For many of these businesses, the alternative lies in a Company Voluntary Arrangement (CVA). "A CVA allows manufacturers to offset some of their deficits against future earnings.
Although stakeholders need to accept a smaller return, it may be greater than would be available through a formal insolvency procedure." So in an effort to avoid going under, many companies have already closed their schemes to new employees and terminated future benefits for existing members.
But are there any other options? "There is a small but growing voice out there in the industry that we need a new defined benefit scheme," says Black. "Risk sharing schemes might be the way forward - where both the employer and employee take some pain." One of the major headaches for businesses has been trying to manage the deteriorating relationship between themselves and their employees.
However, Rhonda Gilmore, a partner and pensions specialist at the Birmingham office of Baker Tilly, believes this has improved in recent years. "Usually in companies there is a reasonable relationship between employer and employees as both parties want their relationship to survive.
They certainly don't want the company to go under." However, Black still believes companies are walking a dangerous tightrope with employee loyalty. "We're seeing a big crossover between pensions law and employment law.
There is still significant resistance in a unionised environment.
The real resistance comes when a company wants to terminate a defined benefits scheme altogether," he says.
There's one relationship that the region's pensions experts think is even more vital, particularly since The Pensions Act 2004 and the approach of the Pensions Regulator have altered the dynamics of the relationship between pension scheme trustees and the scheme sponsors. The effect of the Act has been to impose duties on both parties to work together to fulfil their obligations in relation to scheme funding.
This means that employers will have to share potentially confidential information with trustees, who will be obliged to monitor the employer's covenant. "In the past, before the new Pensions Regulator was appointed, the company would have taken advice from scheme actuaries.
To a certain extent the trustees were in a poor bargaining position," says Rogers. "Now trustees can negotiate quite hard, which has meant that companies have had to negotiate sensibly with them." Thanks to these new laws, employers and scheme trustees are obliged to put a recovery programme in place if they are told their scheme has a deficit.
This means promising to inject enough money, ideally within ten years, to eliminate it. But Emma King, partner at Hammonds, has a word of warning: "Trustees are being encouraged to challenge and take a robust stance in funding negotiations with the sponsoring employers.
While many advisers are promoting the need to compromise and to reach agreement there is a danger that trustees and employers could become increasingly polarised on this issue." Pension funds have also created serious headaches for the region's mergers and acquistions specialists, as Rogers reveals. "In corporate finance deals, pension funds have been key issues.
I've been involved in deals that have been aborted because of pension deficits," he says. "Pensions can be a deal breaker, but it all comes down to negotiating and engaging with the trustees to come up with a sound strategy."
