Screamed the headline in last weekend's FT.
As an aside, this puts all the headlines about The Goblin King's "£5 bn-a-year raid on pension funds" into stark perspective. In today's context, this just shows up UK plc and their collective pension fund trustees for the bumbling idiots that they really are.
This is an opportunity, not a threat! "How? Why?", you may ask...
Well, let's assume that there are 15 companies with final salary schemes, each with a £1 bn deficit. With a bit of co-operation, what these 15 companies and their pension fund trustees could do is:
1. Each company borrows £1 bn from its bank (in the early morning).
2. Each company makes a £1 bn cash contribution to its pension fund, claiming corporation tax relief of £300 m.
3. Simultaneously, each company issues £1 bn worth of corporate bonds.
4. Each pension fund subscribes for £71.4 m worth of corporate bonds in each of the other 14 companies, so each pension fund invests £1 bn in total (for the pension funds, the deal is cash-neutral).
5. Each company collects the £1 bn from the corporate bond issue and repays the bank (in the late afternoon).
And the result is ...
Each company is £300 m better off in cash terms (or as soon as the corporation tax relief materialises). The latent liabilities (pension fund deficits) are replaced with proper liabilities (corporate bonds), so each company's balance sheet is not affected. However the interest on the corporate bonds is fully tax-deductible for the paying companies, but is received tax-free by their pensions funds, ergo, future contributions to the pension funds do not have to be quite as high. So shareholders can sleep easier; their company is £300 m better off in cash terms and future pension contributions have been reduced slightly.
Diminished
1 hour ago
6 comments:
"...this puts all the headlines about The Goblin King's "£5 bn-a-year raid on pension funds" into stark perspective." It certainly does; 5 bn per year, and growing, for a decade - with no hope of getting it back - is much bigger than 15 bn that they might well get back before the bulk of the labour force retires.
As the post explains, pension trustees are daft buggers.
Sure, the ACT credit was stopped (which increased effective rate of tax on the funds' dividend income from 10% to 30%). Pension funds should have simply shifted from shares to bonds, which are totally tax free!
And yet we force every wage earner to pay money into a pension fund every month managed by the most incompetent institution known to man.
If you ask me, indexed funds, savings accounts and investing in your child's education are far better ways of securing an income in later life.
"pension trustees are daft buggers": they certainly are. That's a major rerason why I've retired early - my Tax Free Lump Sum is safely banked, and my monthly pension is more secure because it is now in payment. I loved the way my pension scheme trustees decided to provide against a shortfall not by demanding higher employer contributions, but instead by trusting to the growth of equities. Chumps! Duds! Arseholes!
P.S. If you should wonder what I mean by "safely banked", it largely went on clearing debt. No counterparty risk in that!
D, paying off debts = best form of savings, totally agreed there.
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