Tuesday, 30 September 2008

Sorting out UK plc's pension fund deficits

The stock market is now sliding again to maintain its historic record of underperforming under a Labour government. Having exhibited an impressive 'double-top' formation over the last eleven years, I would expect to see the FTSE 100 fall at least a further 20% or 30% by 2010, putting it right back to where it was in 1997.

Inevitably, there will a lot more headlines like this one. The irony being that UK plc's pension funds are largely invested in shares in UK plc; or put it another way, one-third or so of the shares in UK plc are owned by UK plc's pension funds. Which leads to a vicious circle; if share prices fall, pension deficits increase; if pension deficits increase; share prices fall; and so on ad infinitum.

This is easily fixed, but of course pension funds are not allowed to invest in the employing company, so it requires co-operation by lots of different pension funds;

Let's assume that ten different companies, that are otherwise trading profitably (i.e. not banks!) each have a pension fund with deficit of £9 million (to keep the maths simple). What each of these companies should do is go to the bank in the morning, take out a short term loan of £9 million and pay this to its own pension fund. The pension fund in turn splits the £9 million up into nine tranches of £1 million and invests in new corporate bonds issued by the other companies. Each company collects the proceeds of 9 x £1 million in new corporate bonds (now held by the pension funds of the other nine companies involved) from the other nine pension funds and repays that money in the afternoon.

That's that fixed.

Tax-wise, this is brilliant too; each company gets a corporation tax refund of £2.52 million (£9 million pension fund contribution x 28%), and the interest income that the pension funds earn is truly tax free, as the paying company gets a full corporation tax deduction for the interest paid; unlike the dividend income that pension funds earn, which is paid out of post-corporation tax profits.

Hopefully, once they've pulled this scam a few times, the taxpayer will wake up to the fact that tax breaks for pension contributions do not, on the whole, benefit pensions savers; they are a massive corporate welfare scheme worth £50 billion per annum for the pensions industry.

Just sayin', is all.


Anonymous said...

I never read past the first mention of "UK plc", even on your blog, Mark.

John B said...

But Mark actually *means* UK plc - he's referring to, err, the UK's plcs.

Also, good work on escaping the common right-ish view that the partial removal of tax breaks for the pension fund industry was the Evil Goblin King's Wicked Pension Theft That Destroyed Our Savings...