BT move to cut pensions - implications for millions

[richfool]

A worrying development:

Thousands of pensioners face the prospect of sharply reduced retirement incomes as major British companies attempt to alter the terms of ruinously expensive pension pledges.

Telecoms giant BT has written to current and former workers informing them it is going to court to determine whether it can reduce the annual increases applying to pensions paid to its employees.

BT is far from the only business seeking to argue that previous promises made to staff are today unaffordable, and that they should be allowed to “water down” some of the benefits.

https://uk.finance.yahoo.com/news/bt-ap ... 00861.html

I am sure there are a lot of company pension schemes out there paying increases at RPI which would switch to CPI or lower if they could.

[Alaric]

I am sure there are a lot of company pension schemes out there paying increases at RPI which would switch to CPI or lower if they could.

Saying "sharply reduced" is something of an exaggeration surely. In terms of the effect on income, an amount that increases at say 1.5% rather than 2.5% is going to take several years to make a major difference as the bulk of the payment is unaffected. For an income payment of £ 1000 per month, a 1.5% annual increase adds £ 160 over 10 years and a 2.5% increase adds £ 280. I agree it creeps up over time, but isn't the cliff edge implied by the article.

[staffordian]

I assumed from the 'headline' that swingeing cuts were being proposed, but if I read the article correctly, BT simply want to swap a last remaining group of employees from an RPI based scheme to a CPI based one.

To be honest, I thought virtually all DB schemes had already done this.

I contributed to, and now draw from the Local Government Pension scheme, and that changed several years ago, with little or no fuss, or scaremongering headlines of huge shortfalls in pensioners' incomes, so I don't see why changes to this one in particular should generate such hyperbole.

[Lootman]

A worrying development

I'd actually be more worried if pension entitlements were not being crammed down because, in many cases, both private and public, they are unaffordable and unsustainable at current levels.

[richfool]

A worrying development

I'd actually be more worried if pension entitlements were not being crammed down because, in many cases, both private and public, they are unaffordable and unsustainable at current levels.

Worrying if you are in a receipt of such a pension, and perhaps have little other retirement income.

[Lootman]

A worrying development

I'd actually be more worried if pension entitlements were not being crammed down because, in many cases, both private and public, they are unaffordable and unsustainable at current levels.

Worrying if you are in a receipt of such a pension, and perhaps have little other retirement income.

Sure but the problem with any DB pension is that you are reliant on other people being willing to subsidise your pension payments if, as in many cases, the underlying investments in the plan are inadequate to sustainably fund the benefits. It's almost a form of welfare in some cases.

And if your pension relies on the rest of us to provide for your pension as well as our own, then you can reasonably expect some pushback. I think this will become a massive issue in the coming years as the pension deficits grow and peoples' willingness to write blank cheques declines. Taxpayers and shareholders can only pay so much.

[richfool]

Sure but the problem with any DB pension is that you are reliant on other people being willing to subsidise your pension payments if, as in many cases, the underlying investments in the plan are inadequate to sustainably fund the benefits. It's almost a form of welfare in some cases.

And if your pension relies on the rest of us to provide for your pension as well as our own, then you can reasonably expect some pushback. I think this will become a massive issue in the coming years as the pension deficits grow and peoples' willingness to write blank cheques declines. Taxpayers and shareholders can only pay so much.

I think most people taking occupational pensions will feel that they have contributed towards and earned those pensions on the terms and at the level of benefits that were applicable & in force throughout the period they contributed. Rather like a contract, the level of benefits was known during the period of contribution & participation. To later seek to change the basis of payment/benefits when the pension is in payment is wrong, - rather like breaking a contract.

Taxpayers or shareholders are not involved. I am talking of employer's occupational pensions plans. Such plans or rather the benefits of such schemes were or should have been ring-fenced and separate from the company's finances, performance or shareholders, to protect them from the vagaries of a business' performance. Noted that employers may from time to time need to adjust or top up their levels of contributions, and sometimes employees too.

If the level of performance of the fund or the level of funding or numbers currently contributing into the scheme, becomes substantially inadequate, then a solution would be to change the arrangements for new/future members, or to close the existing scheme and start a new one on suitable terms, which many have done or are doing, but not to renege on existing previously agreed pensions in payment.

As an aside, I think it is morally wrong for HM Government to now be changing/deferring retirement ages under the state pension scheme, when those who have been contributing into it for so many years did so on the understanding that they would be receiving their state pensions from age 65. Any changes (or changes to terms such as that) should start for those newly entering the system. But that's another story and one which fortunately doesn't affect me.

[Alaric]

Taxpayers or shareholders are not involved. I am talking of employer's occupational pensions plans.

The problem is that if the assets of these schemes are not enough to finance the benefits, then someone is on the line for the shortfall. That's shareholders for a private sector scheme and taxpayers for a public sector one.

[Lootman]

To later seek to change the basis of payment/benefits when the pension is in payment is wrong, - rather like breaking a contract.

Taxpayers or shareholders are not involved. I am talking of employer's occupational pensions plans.

If your pension fund lacks the assets to pay your pension, then by definition those funds have to be found elsewhere. Either they come from shareholders in the form of lower returns or they come from the taxpayer in the form of a pension indemnity scheme if, say, the company is driven into bankruptcy by the pension liabilities.

As you admit, state pensioners can and are crammed down. Shareholders can be crammed down into lower returns. Taxpayers can be crammed down by increasing taxes. So why the heck can't you be crammed down as well? Sacrifice is a shared enterprise and nobody gets immunity. In fact, I'd argue that you should have done better due diligence on your employer and not chosen a job with a company without first analysing their long-term fiscal ability to pay overly generous pension obligations.

Choosing an employer is like choosing a share. Choose one with a broken model and you should pay the price for your erroroneous judgement, and not the rest of us who made better decisions than you did.

[richfool]

Sacrifice is a shared enterprise and nobody gets immunity. In fact, I'd argue that you should have done better due diligence on your employer and not chosen a job with a company without first analysing their long-term fiscal ability to pay overly generous pension obligations.

Choosing an employer is like choosing a share. Choose one with a broken model and you should pay the price for your erroroneous judgement, and not the rest of us who made better decisions than you did.

Choosing an employer based on their pension scheme future benefits. Hmmm, yes, theoretically a point to be considered, but who would realistically be able to make such a judgement 20 or even 40+ years in advance of retiring and taking the benefits, and envisage how the pension scheme might evolve in the future. In the case of BT., it would have been a corporation and was yet to be privatised, back when staff would have had to made that judgement.

I take your use of the word "you" to equate to "one" (as in "a person", as opposed to specifically me). My occupational pension in payment pays me a set rate of increase each year, with the pension trustees having discretion to pay a higher increase if inflation should exceed that percentage.

[Itsallaguess]

I think most people taking occupational pensions will feel that they have contributed towards and earned those pensions on the terms and at the level of benefits that were applicable & in force throughout the period they contributed.

Rather like a contract, the level of benefits was known during the period of contribution & participation. To later seek to change the basis of payment/benefits when the pension is in payment is wrong, - rather like breaking a contract.

Hmmmm.....not quite sure that approach can ring true of all defined-benefit situations.

Take, for instance, a closed-to-new-entrants scheme, where retirees in current payment do not see their payouts cut, under your 'it's a contract, innit..' approach, but where the remaining employees paying in continue to see an eroding of their entitlements as the longevity light-bulb has got brighter over recent years....

Those remaining people paying in have often seen extended working lifetimes, as well as a redefinition of their payouts (think 'average-pay' multiples for some working periods as opposed to the previously granted 'final pay' multiples...), and then the cherry on the top of regularly drip-drip increases to their actual pensions contributions....

So whilst it's great to discuss 'contracts' regarding those currently receiving their DB benefits, there's also the consideration that the people still actually paying for that privilege don't get the chance to avoid these and similar changes....

I personally think that it's about time the pain was spread around more, and if that's the situation that needs to occur to keep these schemes solvent then so be it....

Cheers,

Itsallaguess

[Alaric]

in most cases the pension was very much a case of deferred income. Many of the issues with DB pensions have been caused not by members of the plans but by HMG.

From several different directions. Increasing the deferred income by imposition of indexation would have been one. Insisting that schemes hold less risky investments and then reducing the yields on such investments another. Curtailing the tax advantages another.

[Lootman]

the pension was very much a case of deferred income

But you could say the same about many job benefits and perks.

For instance I might take a job with a lower salary because there are potentially large bonuses paid out annually, like many City jobs.

Or I might be OK with a lower salary if there are share or option ownership schemes and I expect the company to do well enough to grow in value. Or I might work for less at a private company where I am hoping to cash out with a future IPO. These are typical with Tech employers, for instance.

In each of these cases I am accepting a risk - that the "jam tomorrow" never happens and I worked for less than I was worth. So why is a pension any different from that? Again, I work for less in the hope that that gold-plated pension is still affordable when I retire. But my employer could go broke or its pension fund may perform badly.

Choosing an employer involves more than just assessing the day-to-day work and the salary. It involves an assessment of the future prospects of the enterprise. Those who choose badly will do worse, just like those who buy the wrong shares. Imagine working for Google versus working for Enron, for instance.

[richfool]

For instance I might take a job with a lower salary because there are potentially large bonuses paid out annually, like many City jobs.
In each of these cases I am accepting a risk - that the "jam tomorrow" never happens and I worked for less than I was worth. So why is a pension any different from that? Again, I work for less in the hope that that gold-plated pension is still affordable when I retire. But my employer could go broke or its pension fund may perform badly.

I think you are being somewhat selective with your examples & comparisons.

Bonuses are rather different to pension schemes. It's a well known fact that bonuses are subject to performance and can be taken away or renegotiated, and could for example be affected by market forces.

I don't see a company final salary pension scheme as "jam tomorrow". I see it as "bread & butter", and something that has been earned/paid for by the individual. Indeed the staff member/pensioner may well have received (or chosen to receive) a lower salary because of the attractive final salary pension scheme. And if I was for example, a BT pensioner, I would feel less than happy if someone later came along and replaced the "bread & butter" that I had earned, with "bread & dripping", or just plain bread.

Choosing an employer involves more than just assessing the day-to-day work and the salary. It involves an assessment of the future prospects of the enterprise.

I work for less in the hope that that gold-plated pension is still affordable when I retire. But my employer could go broke or its pension fund may perform badly.

Your last quote/comment seems to contradict the preceding quote and confirm my earlier point that I don't see how anyone could be expected to assess the prospects of their employer's business prospects or pension plan, 40 years ahead.
Anyway I'll leave it at that.

[Lootman]

I don't see a company final salary pension scheme as "jam tomorrow". I see it as "bread & butter", and something that has been earned/paid for by the individual. Indeed the staff member/pensioner may well have received (or chosen to receive) a lower salary because of the attractive final salary pension scheme. And if I was for example, a BT pensioner, I would feel less than happy if someone later came along and replaced the "bread & butter" that I had earned, with "bread & dripping", or just plain bread.

I suppose it comes down to a difference of perception. As much as that BT pensioner feels entitled to the pension he was told he would get, the simple fact is that if there is not enough money in the pot to pay that pension, then something has to give. And unless that pension is reduced then the implication is that other people have to pay more in terms of tax or reduced investment returns so that you are not inconvenienced.

In other words you expect others to subsidise your retirement, and I think you need to convince those others that they should, especially as many of them will have worse pension provisions than you do.

I don't see how anyone could be expected to assess the prospects of their employer's business prospects or pension plan, 40 years ahead.

Agreed, it's not easy and it may not be possible. But my point was more that you should accept the risk involved in every pension plan - the risk that the assets may be insufficient. You should not assume that others will impoverish themselves to compensate you if your bet goes wrong.

And by "you", I don't literally mean you, just those on DB plans who want to regard their cashflows as sacrosanct. I recall when GM went bust, a big part of that was because of pension and healthcare liabilities. As part of the restructuring, the unions took over those liabilities at a discount, and the workers understood their benefits would be reduced. But at least they got to keep their jobs. That's the kind of tradeoff I expect to see happen more often.

[hiriskpaul]

An interesting discussion, but I am in complete agreement with richfool. BT have a contractual obligation to fund these DB pension commitments. They cannot simply change the terms because directors decide the pension commitment is unaffordable or "unfair", any more than they can unilaterally decide to pay lower interest on bank borrowings or issued bonds. If that is inconvenient to shareholders, then that is just tough. Shareholders are at the bottom of the hierarchy, entitled to profits, but only after all other financial commitments have been met. Onerous legacy pension commitments is part of the risk one takes in being an ordinary shareholder.

BT are going to court to try to switch the C pool from RPI to CPI. I am not sure what legal arguments they have for this, but I would expect the High Court to throw out any arguments along the lines of the scheme being "unaffordable" or "not fair" to other pension pools.

Of course if the C pool commitment really is unaffordable, then essentially BT are saying that they are heading towards default and need a bailout. In that circumstance it would be perfectly legitimate for BT to negotiate a settlement with the pension fund, but they should do that by negotiation with all their creditors - not just the C pool pension fund. If I was a BT pensioner, my first question to BT would be "How can you afford to pay dividends?"

[staffordian]

An interesting discussion, but I am in complete agreement with richfool. BT have a contractual obligation to fund these DB pension commitments. They cannot simply change the terms because directors decide the pension commitment is unaffordable or "unfair", any more than they can unilaterally decide to pay lower interest on bank borrowings or issued bonds. If that is inconvenient to shareholders, then that is just tough. Shareholders are at the bottom of the hierarchy, entitled to profits, but only after all other financial commitments have been met. Onerous legacy pension commitments is part of the risk one takes in being an ordinary shareholder.

BT are going to court to try to switch the C pool from RPI to CPI. I am not sure what legal arguments they have for this, but I would expect the High Court to throw out any arguments along the lines of the scheme being "unaffordable" or "not fair" to other pension pools.

Of course if the C pool commitment really is unaffordable, then essentially BT are saying that they are heading towards default and need a bailout. In that circumstance it would be perfectly legitimate for BT to negotiate a settlement with the pension fund, but they should do that by negotiation with all their creditors - not just the C pool pension fund. If I was a BT pensioner, my first question to BT would be "How can you afford to pay dividends?"

Whilst I can see your point, and essentially I agree with it, why should BT pensioners be treated better than others who have had their rises aligned to CPI rather than RPI, or those who have worked towards a state retirement age and paid taxes and NI on the basis of what was promised?

As I mentioned in an earlier post, Local Government pensions were changed in this way several years ago and there was little or no fuss made about the reduction in benefits compared to what was promised to employees when they entered the scheme anything up to forty or more years earlier. One could argue, as you have, that the local authorities should cut back on their expenditure on services if they cannot meet their contractual obligations to their past and present employees, but I suspect this argument would not be well received.

[Lootman]

One could argue, as you have, that the local authorities should cut back on their expenditure on services if they cannot meet their contractual obligations to their past and present employees, but I suspect this argument would not be well received.

There is no need to suspect. It's already happened. A number of US cities have made cops redundant because of the deficits incurred by paying out insanely generous pensions to retired cops (often at age 50 and they just go out and get another job in "private security").

And it is the public sector where this will really ignite. There are really only three possibilities:

1) Keep raising taxes, but the taxpayers will revolt
2) Cut government services so that a relatively small number of entitled pensioners can live large
3) Cram down their pensions in the public interest.

Well, there is a 4th possibility, at least in the US, because municipalities can declare bankruptcy, under Chapter 9 of the bankruptcy code (although States cannot). Could Liverpool go bust? Or BT? If so, those pensioners are going to get shortchanged anyway.

[JohnB]

I've never had a DB private pension, only a DB public one, but as I understand it the company pension scheme is not fully ringfenced from the company finances, money can flow both ways, to the company if the pension fund is doing well, and the reverse is badly, and both have occurred over the last 40 years. I suspect now the headwinds are all against the pension fund, so the companies are fighting hard to cut contributions, and its in no-ones interest if they go bust. The worst possible scenario is having both your salary and pension fund tied to your employer's fiances, as if it goes bust you lose your job and savings. DC, for all its faults reduces the risk of a double hit. But the recruit should understand that a DB company pension has that risk, as DB public one has political risk.

I think pensioners need to be pragmatic, no-one can expect unrealistic promises to be kept, but still if you joined Shell, or the Civil Service, the pension was a clear facet of the job, and can't be talked away by Daily Mail readers who chose different organisations and bleat about the unfairness of 'gold-plated' deals they turned down.

[TUK020]

There is one other big difference between private and public sector that never seems to get aired.

In the private sector there are accounting standards and reporting rules that mean a company's obligations to fund pension promises are clearly spelt out and costed, and rules about making good shortfall against those obligations.

In the public sector, pensions are a huge Ponzi scheme, and accounted for by government in a way that would land any private company director in jail.

The first step in ensuring pension rights is transparency in the accounting of obligations. No politician seems to want to own up to how unaffordable the promises they are making are.

We thought the bank bailouts in the GFC were expensive - they are less than the unfunded public sector pension liabilitiies.