Connected Research

Union policy research in the 21st century

Ralfe has a bit of a go

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Today’s Financial Times highlights some of the results of a report by pensions consultant John Ralfe for TalkTalk, BSkyB and Cable&Wireless on the Ofcom Pensions Review, the first stage of which closed last week.

Ofcom has now started to publish the non-confidential responses – including that by the Connect Sector of Prospect – (follow above link, or go here) but while each of the three companies’ responses refers to the Ralfe report as having been provided to Ofcom, it doesn’t unfortunately appear on the site, and Ralfe’s own website appears to be a little shy of carrying it just yet. That’s a bit of a shame as I’d like to see it – though perhaps it is a private report (in which case its use in a public policy-making process is, perhaps, somewhat limited).

The pink’un‘s report indicates two issues that Ralfe has highlighted:

1. BT hasn’t paid the full costs of its early leaver programmes;

Ralfe costs these at £3.2bn and contrasts this with what he says BT paid into the scheme (£1.1bn). The £1.1bn is easy – that comes from BT’s accounts, helpfully summarised in Table 5, p. 41 of the Ofcom consultation document, while the £3.2bn is a product of Table 5 and Table A3 – essentially, it is the accounting charge figure for the costs of the release schemes.

But how does Ralfe know that BT hasn’t paid these costs in full? The accounts may well provide a specific cash figure for what BT has paid in release programmes – frequently as a result of specific requests from the trustees and as a result of what actuaries at the time said was the cost of such programmes – but BT has paid more than £3bn in additional special contributions since 1990. The need for additional special contributions has a number of reasons, including people living longer in retirement, investment returns being less than envisaged requiring what we now call a recovery plan to be put in place, changed actuarial assumptions – and, as Ofcom points out in para. 5.56, the effect of early release schemes.

The point is that BT has had to stump up such costs out of its other operations whereas, in reality, it is a normal business cost that should have been present in its regulated costs all along.

2. And the scheme was £626m in deficit on privatisation and BT should have dealt with this by putting its money into index-linked gilts.

The figure for the size of the deficit is new – we were aware that, in the words of the valuation of the scheme prepared in advance of privatisation, ‘The resources transferred were not sufficient to meet the liabilities assumed by the Scheme’. There was a deficit in the Post Office Staff Superannuation Scheme at the time and, thus, the newly-established BT scheme essentially assumed a share of this. According to the FT, Ralfe obtained this figure via a FoI request – and he’s done helpful work here. (By the way, £626m in 1984 was a huge sum – a real millstone hung by BT’s privatisers around the neck of the company, equivalent to around £1.5bn at 2007 prices.)

Ralfe’s long-held view is that all pensions assets need to be invested in risk-free vehicles – the source for his belief that the BTPS would now be £4.5bn better off. Indeed, while he was at Boots, he pioneered a switch of assets entirely into bonds – a move which has, since his departure, been at least partly reversed (as I blogged about here). Interestingly, the valuation published in March 1986 held that the assets were – in the rather more imprecise language of pensions valuations in the times – ‘now very nearly sufficient to meet the cost of benefits’. So, investing in equities had ‘very nearly’ (!) wiped out the deficit in a couple of years.

The difficulty that Ralfe faces in rationally sustaining his charge here is an old one, of which he is likely to be well aware – pensions are long-term investments and measuring their worth at any particular period of time – or between any two periods of time – essentially gives only a snapshot picture. And one that is more or less useful, depending on the assumptions made and the time at which they were made. In December 2008, the assets of the BTPS, according to the scheme’s annual report and accounts, stood at £31.3bn; one year earlier, they had stood at £39.7bn. So, assuming that the scheme would, on current figures, be £4.5bn better off had it invested in index-linked gilts since privatisation ignores that it would have been pretty much about the same amount worse off had the current figures reflected the December 2007 situation rather than the December 2008 one. And, of course, there has been a stock market recovery since December 2008 and the asset base of the BTPS is now likely to be in much better health as a result.

These remain difficult times for the BTPs, as for all schemes – and they are ones that are not likely to be beneficially confronted by precipitate actions of the type recommended by Ralfe.

As for the Regulator, the point facing it is, essentially, one of principle: should a regulated company be able to recoup the full costs of providing its regulated products and services, even though some of those costs might not appear until later? There can only be one answer to that.

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Written by Calvin

01/03/2010 at 7:03 pm

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