Big Scary Numbers & debt-for-equity swaps

Most of today's newspapers carry an article with a headline along the lines of Company pension deficit hits a record £300 billion, to use The Evening Standard as an example. They write:

The accountant [Deloittes] predicted that businesses would be forced to find alternative means of bolstering funds, such as putting property into the pension fund pot, rather than just cash. These alternatives would allow companies to revive their pension plans without eating into profits. Deloitte pointed out that closing final salary pensions would not be enough to make much of a dent in the shortfall.

Well, duh. This is yet another manifestation of the credit bubble, whereby employers commute part of employees' salaries into a vague promise of a future pension.

(To digress for a moment, final salary pensions are doomed to failure of course, because the company will tend to overestimate the future cost, and the employee will tend to underestimate the future value, leading to a terrible mismatch. See also John B's slightly lengthier take, there's a link in my "Words of Wisdom" widget. Contrast that with a good old-fashioned pay rise - the employee gets £x extra per month; provided he values his free time at < £x and the employer values his output at > £x, then both sides win, but back to the practical problem in hand...)

These deficits can be easily fixed without "eating into profits", as follows:

Let's assume there were just two plc's involved, A and B, each with a deficit of £1 billion. What A should do is go to the bank in the morning, borrow £1 billion and give it to its pension trustees, who in turn invest in £1 billion's worth of new shares issued by B. A simultaneously issues £1 billion new shares for cash to B's trustees, takes the cash and repays the bank in the afternoon.

B and its trustees do exactly the same, and by tea-time, each plc's deficit has been wiped out - a latent accounting liability has been converted to into share capital, with the kicker that A and B can then claim a corporation tax deduction of 28% x £1 billion, and the bank has earned a few hours' worth of interest on £2 billion*.

Continuing the theme, once their pension funds have been replenished, A and B can say to their employees, "Look, this is all getting a bit messy, we calculate that the actuarial net present value of your pension promise is £x,000. Would you like to waive your pensions and take [slightly less than] £x,000's worth of stocks and shares instead?" Each employee would probably be pleasantly surprised and keep the shares for the investment income; keep them as a cushion against redundancy; or indeed sell them and pay off a bit of his mortgage or something, so that would help deleverage the household sector as well.

What's not to like?

* I first mooted something along these lines, I suggested that A and B issue bonds rather than shares (to get the tax deduction for interest payments as well), but seeing as deleveraging is the flavour of the month, I am now suggesting issuing shares.