Company pensions

Recently Sir Philip Green has been given a real hammering by one of the parliamentary committees over the liquidation of British Home Stores with no allowance for payoffs or pensions for its 11,000 staff.  How could this happen?

The simple reason is that unless a company sub-contracts the pensions to a regular pension provider, which then acts as surety for the employees, there is no safety net.  Usually the pension fund is an illusion with the contributions remaining part of company funds and are used for investment to assist in company growth.

This is all very well when the company is doing well or actually growing but when the reverse happens the argument becomes that if the funds set aside for the pensions are not used to prop up the company it will fail anyway and all is still lost.  There is a strong argument that pension savings should not be part of company funds and should never be used to prop up failing companies.

I am pretty sure there are an enormous number of companies that have never had enough money in liquid assets to cover the accumulated pension debt.  Technically it could be argued that as soon as a company’s pension liability exceeds the company assets and that other loans cannot be serviced that the company is in fact bankrupt.

 

My personal pension

As a young man, when I started earning and paying pension premiums I asked a number of people if in fact the money I was paying out was going into a fund with my name on it.  Most people had never thought about that and couldn’t say but my father said what he believed is that the money I paid out for a pension was used to pay the pensions of those who have already retired.  Clever man.

As I grew older it dawned on me that being part of the Baby Boom Generation that there would be less people following on to pay enough pension premiums to fund our retirement.

One thing we were advised was to put money aside for our old age so that we could benefit from the interest and if necessary eat into the capital.  So much for that!  £100,000 in the bank can now earn you a whopping £250 a year to supplement a pension.

 

State pension

We are all entitled to some amount of state pension provided we have paid National Insurance contributions.  These contributions we paid were paid out to pensions during our working lives and now a smaller generation of earners are contributing to our state pensions.

That is how it is supposed to work BUT now that the NHS has ballooned into this money guzzling monster there is little left out of annual NI contributions to pay the pensions.

That is why successive governments have all been so keen on immigration, because it supposedly increases the workforce and the amount of tax and NI collected to pay for existing government obligations.  I contend that an ongoing economic model that requires endless immigration to succeed (or even cling on) is fundamentally flawed.

 

Public & civil Service Pensions

I have always been unhappy about civil service and public service pensions and I even upset a couple of people I came into contact with regularly over the pensions they were receiving.  They claimed that they paid 6% of their salaries into the pension pot and their employer then put in a further 14%.  What they didn’t consider was that the employer was actually all the rest of us through taxes.

So what was the government actually doing about the public sector pensions.  They were paying the employees salaries less the 6% pension premium.  In effect they were reducing the salaries by 6%.  They were not putting that money in a pot, either individually named or a communal pot but spending it on other commitments.

All subsequent governments were doing was recording an amount of money as a virtual fund to each employee, so the 14% was never actually paid.  Over time of course the amount of money promised by the government including the 14% top up and interest has ballooned into an enormous debt that now stands at something like £4,700 billion and can never be paid.

 

The banking crisis

The banking crisis was caused because banks were allowed to lend more than they kept in their vaults.  The banks and building societies were allowed to record a loan or a mortgage as part of their assets and back in the 1960’s were allowed to then lend four times that amount as further loans.  More recently the multiplier was increased to ten times and for shares trading up to thirty times the value of existing loans.

This of course meant that steadily through the 1980’s, 1990’s and early 2000’s the banks became ever more bold in trying to lend money to anyone who would accept it.  In desperation the banks became less caring about the ability of a borrower to ever pay it back and these have become known as toxic loans.  Eventually banks holding the greatest value in toxic loans started to falter and in a flash the bubble burst.

 

Irresponsible people

We have been told by the government and the media that the banks were greedy and incredibly irresponsible in lending to those who would never pay it back.  So they were because even at the 4:1 multiplier, which is where we have reverted to, three quarters of the money loaned at any time doesn’t exist except on a spreadsheet.  Money is debt.

Successive governments have continued to promise what are termed gold plated pensions to their employees when there is no prospect of them being sustained in the long term.  The present government is overspending at a rate of £5b a month, has a debt with the European Central Bank and International Monetary Fund in excess of £1300b, and a public service pension liability of  £4,700b.

When any organisation is mired in debt and cannot service the interest on existing loans without incurring further debt it is by definition bankrupt.  How dare the parliamentary committee take the ‘holier than thou’ attitude with Sir Philip Green when they are in an even worse financial situation similarly ignoring their pension liability.

 

Pension Solution

There is really only one solution to the public service pension problem, and that is for the government to renege on the 14% top up and only pay the 6% pension premium notionally paid by the employees!  Even doing that still leaves the government with a £1.4b public service pension liability and brings their employees to the same miserable pension levels as private sector workers.  Welcome to the real World.

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