Tata Steel Workers were told not to worry about their pensions as the company and the government had introduced a ‘quick fix’ that could resolve many of its issues. However, the said multi-billion pound solution has many flaws according to analysts.
The UK government has allowed the change in pension law that would allow Tata Steel to have £2.5bn produced by itself running on a self-sufficient basis. It can cut back on future pension increases for members in the future.
The solution was made after the government made consultations that would allow Tata’s pension scheme to run on a “standalone” basis.
But unpublished analysis for government, dated two weeks after the consultation was launched, raised a number of reservations over whether the self-sufficiency proposal was low-risk for the scheme’s 130,000 members, many of whom would have been current or former workers at the Port Talbot steel plant.
“To eliminate most of the risk of the scheme being unable to meet its (reduced) liabilities in the absence of any sponsor support (ie self sufficiency) would require additional assets which we have estimated to be in the region of £3-£4bn,” said the GAD analysis, which was dated June 13 and has been seen by the Financial Times.
“In order to have a very high level of confidence at 31 March 2016 that the BSPS will provide the amended benefits in full, a very significant amount of additional funding would be required,” it added.
The 16-page report — prepared for the Department for Work and Pensions — also said that without a “viable sponsor” the BSPS could pose “significant risk” of falling into the pensions lifeboat fund, “with a materially larger deficit than at the current time”.
With the triple lock for state pensions facing huge pressure for dismantlement and the UK government’s perspective of “inter-generational fairness” over pensions, elite pensioners may lose their free bus pass, winter fuel allowance and TV licence in the process.
The transparency investigation intends to expose that the government is not favouring pensioners over other age groups especially with regards to benefits.
Benefits for today’s pensioners cost about £8bn collectively a year. These pensioners have paid huge contributions to their funds. However, as most of them have their own investments, the state pensions are only supplementary as they do not exactly need any fiscal help.
The Conservative general election manifesto pledged that the UK government will not introduce any cuts to pensioners’ benefits until 2020. But the arrival of new Prime Minister Theresa May and Work and Pensions Secretary Damian Green, pensioners face no protection at all.
Mr Green said that the policy of ringfencing pensioner benefits and protecting them from huge cuts could be trashed at any time.
Analysts believe the investigation will find clear evidence that the government had always favoured retirees especially with ringfencing strategies. Benefits for those at the working age are facing deficits while the state continues to pay six-figure pensioners with benefits that help them cover heating bills during winter.
Fearing a dividend cut from Carclo, other leading UK companies have investors on the run as the trend threatens to continue.
“Carclo could be the canary in the coal mine and the precursor to dividend cuts at other groups,” says Matthew Beesley, head of global equities at Henderson Global Investors. “Companies are diverting more cash for pensions as a black hole is opening up. More money is needed to meet pension benefits, which means there may have to be cuts in dividends.”
Defined benefit pension schemes that allow employers to pay guaranteed retirement income to members grew to a huge black hole in the United Kingdom reaching to tens of billions of deficits.
In all of Britain’s 350 leading companies, the amount has reached a record of £189bn by the end of August.
According to the Pension Protection Fund, the overall deficit of the 6,000 UK Defined Benefit schemes have reached £459.4bn in August, which was up a hundred billion the previous month.
Investment groups are selling shares from large companies fearing a huge dividend cut is to come.
“Companies will hold off from making dividend cuts for as long as they can, but the fall in bond yields does not look temporary,” he adds. “We are close to the point for some companies where they either reduce the dividend or cut investment.
UK’s biggest companies may soon share the troubles of BHS and Tata Steel. About £50bn was gone from the final salary and other defined benefit pension schemes in many UK companies last August.
According to Mercer’s pension risk survey, the deficit has grown to £189bn on August 31 from £139bn at the end of July. This was the biggest increase in deficit since records began in the history of the United Kingdom.
Ali Tayyebi, senior partner in Mercer’s retirement business, noted the deficit increase was largely driven by a further sharp fall in long dated corporate bond yields.
“This also means that our reference long-dated corporate bond yield has now fallen below two per cent per annum for the first time representing yet another milestone into uncharted territory,” he said.
Calling the increase a “relentless march”, Le Roy van Zyl, senior consultant in Mercer’s financial strategy group, called for action to reverse the trend.
“The first key question to address is how much deficit contributions should the sponsor be paying, recognising the security needs of the pension scheme as well as the appropriate alternative uses for this cash,” he said. “Another key question is how much risk should currently be run; on the one hand, can the scheme and sponsor afford conditions to deteriorate further, but what is the opportunity cost if risk is reduced now and markets improve from here on out?”