In the context of nothing in particular, Motley Fool ran a fine summary of the nine FTSE companies with the biggest pension fund deficits. The figures provided are: market capitalisation (£ bn); pension fund deficit (£ bn); and pension gross liabilities as a % of market capitalisation.
The distinction between the assets of the pension fund and the assets of the company itself is a purely legal one, seeing as the pension liabilities are liabilities of both combined, so it is useful to compare gross pension liabilities with gross consolidated assets, which gives us the following figures:
British Telecom - 86%
British Airways - 85%
BAE Systems - 72%
Invensys - 65%
Royal Bank of Scotland - 58%
Aviva - 57%
Royal Sun Alliance - 56%
Rexam - 55%
National Grid - 52%
Smiths Group - 43%
In other words, in economic terms, employees of BT or BA who are still in one or other of the final salary pension schemes actually own 86% or 85% of the whole thing. So if they go on strike often enough, what little residual value belongs to the shareholders will be wiped out first and they would be worker-owned co-operatives along the lines of the John Lewis Partnership. Would the employees at that stage stop threatening to strike, or would the businesses just implode because they'll keep on threatening strike action by force of habit?
What is also striking is that three of those are privatised utilities, two are insurance companies and one is largely nationalised bank. BAE Systems' largest customer has always been the government or governments.
Nothing subtle about it
2 hours ago
13 comments:
You've read my post from March on how this impacts BA, right?
I don't think BT, Aviva, RSA or NG shareholders need to worry - they're effectively utilities, one way or another, and so can set their prices to reflect costs. I had a friend who was involved in doing this for BT - basically, unionised workers and the costs of pension funds for current & former workers of the division are ascribed to the regulated, "you must offer things to your retail division at the same price as to competitors" bits, and the competitive bits don't have quite the same ridiculous cost base.
(it's a massive poison pill for BT's management though - nobody in their right mind would take over BT, because you're effectively buying a giant pension fund with a mid-sized telco attached. At the height of boom silliness the Irish national telco did get bought out, but that was one of the biggest insane PE deals ever and won't be repeated, and is 1/10 the size of BT...)
BA, BAE (which I think now gets more than half its revenues from the US government), Invensys, Rexam and Smiths are more concerning, as they're actually operating in competitive markets where revenues aren't guaranteed.
JB, I've read it now and I think you underestimated the position. You said "money that BA owes to its workers and former workers accounts for more than half of the company’s total value." whereas on a consolidated basis it's 85%.
Can you explain that cost allocation thingy? Do you mean that BT simply overcharge the competition to recover these costs (simultaneously overcharging themselves as well, as a smoke screen)?
A well put point Mark
Vendetta RFB
seeing as the pension liabilities are liabilities of both combined, so it is useful to compare gross pension liabilities with gross consolidated assets
Nope, try as I might, I could never be an accountant.
R, ta.
JH, just imagine you run a business (a school, for example) and you promise your teachers £x per year when they retire in pensions.
You, as employer, might gamble on the business growing and expanding (so that you can pay future pensions out of future profits) or you might go on the safe side and actually divert some money into a separate pension fund.
We can ignore pension fund returns (because all your pension fund does is invest in other companies - so those companies have the same dilemma: should they pay their profits as dividends into 'your' pension fund or pay them directly into their own pension funds?).
So ultimately there is only one source of future pension fund income - and that is the profits of your school. If you keep promising ever more generous pensions, you reach a stage where all your school's future profits have to be paid out as future pensions to your teachers.
In economic terms, your teachers now 'own' the school. However hard you try, you cannot improve your own position, as every £1 profit you can make is already earmarked for the teachers.
A useful list of shit to avoid. Makes me happy I went for Vodafone at 131p in the lastest pre-ex-divi dip.
To think it was a toss-up between them and BP!
Mark -
1) I think I was doing it by market cap and you were doing it by balance sheet assets. For a company like BA that has significant brand value that isn't recognised on the BS, I reckon market cap is probably better.
2) Yes, although not in any way proveable by competition regulators etc. They shifted their most unionised, most years-served, etc, employees into a subsidiary called 'Openreach', which does all the regulated, running-wires-to-your-house type stuff. This is then sold at the same (regulated, set by Ofcom) price to BT Retail and to competitors like Talktalk.
This doesn't stop the pension fund being a drag n the company's overall value, but it does mean that its new entrant competitors aren't in a Ryanair vs BA situation when it comes to paying the costs of unionised, heavily pensioned workers versus not.
S_L, the bad news is usually in the price...
JB,
1) I was very much using market cap, but I was not dividing (pension fund deficit)* by (market cap), i was dividing (total pension fund liabilities) by (market cap + value of pension fund assets).
* Of course, (pension fund deficit) = (total pension fund liabilities - value of pension fund assets), so I just added (pension fund assets) to the bottom half of the fraction rather than deducting it from the top.
2) Thanks for explanation. So Ofcom are letting them get away with this then?
OK, I was just doing pension fund liabilities as % market cap. Since it's a bank holiday here and I've been drinking since lunchtime, I can't be bothered to think about which measure is better.
And yes - they brought in clever people from consultancies to make damn sure that whatever they were doing wasn't provably wrong. This relates to Jonn 'Editor Of PFI Magazine' Elledge's piece on LC the other day that anyone competent with any knowledge of government/regulatory issues turns poacher, because the rewards are far greater.
Since it's a bank holiday here and I've been drinking since lunchtime, I can't be bothered to think about which measure is better.
Actually, a double. Definitely a double. *hic*.
JB, as the more relevant fraction, my thinking is thus:
Imagine two companies A and B, each with market cap £10 and pension fund deficit £1. But one has pension liabilities of £9 and pension fund assets of £8; the other has pension liabilities of £1 and pension fund assets of £ni,
Using your question, they are both ranked at 10%. Using my equation, A is ranked at 50% and B is ranked at 10%.
I think comparing gross-for-gross is better, because if share prices tumble and annuity rates fall (so liabilities rise), A is knackered, but B would still be able to muddle through.
John_b’s forthright statements are very amusing – I presume he was dating a para-leqal who had the unenviable job of copying the legal submissions and who is now a telecoms expert as a result. Slightly surprised you let yourself be fooled, Mark. And I love the instinctive Socialist’s disdain of the little people. Think about it. There is a big countrywide network, buried quite deep that carries traffic all round the UK in diverse ways. Every 20 years, some farmer digs too deep and a whole pipe gets severed…the network is able to recover after a while.
Then there is the difficult beast – the access network. For mail, it is the last mile…how do you get those mailshots into people’s houses. The pipes that run from those local exchanges – either 30s tudorbethan or 60s brutalist (historic York has a wonderfully brutalist exchange). The lines run to those green cabinets. The threats are varied. They run in culverts shared with other formerly nationalised utilities. So a damaged joint might be submerged in a water-filled culvert lived in by a thousand rats…the water full of their shit. It still needs to be repaired. The infrastructure tends to be copper and is old…so you find many instances where thieves simply go to rip out the copper…(or aluminium in Milton Keynes and Hampshire)…for the scrap value. Or maybe there is a flash flood that takes out the telephone poles. Someone has to re-erect them and string up the wires. Is it acceptable for BT not to have a 24/7 available service? Try getting the same service from Sky or Virgin.
What John_B and his under-informed source did not say is that the Openreach settlement makes that service available to all operators at the same price with the same service levels. It is a HUGE barrier to entry that disappeared overnight. With 200 engineers, VM can only offer comparable service to major conurbations. If you live in Padstow, bye bye network for a few months if there is a severe flood.
How much would you pay for 24/7 availability…which is what we tend to get. The price is a force of country-wide engineers who tend to do the business when it really counts (let’s not exaggerate here)…you would imagine a Socialist’s heart would be warmed by that.
Anon, you amaze me.
I hate to break this to you, but I use the fine services of Virgin-NTL-Telewest who dug up their own pavements and provide an infinitely better service than BT.
You completely missed the point of the post anyway, which was that BT is a worker-owned co-operative. As ultimately BT cannot charge more than 'market value' (or else people will use other providers) and as it is BT's workers providing the service,
I am perfectly happy for BT's workers to receive the full market value of the services they provide. In which case the shareholders are stuffed. If that's what you deride as 'Socialist', then so be it.
Or is your view of 'Socialism' that they are the ones who want to screw over the workers who provide the service, or what exactly?
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