A Second Pension-Scheme Revolution

(Mar 20, 2014)

In his book Unseen Revolution, Peter Drucker drew attention to the structural changes in economic ownership which were silently ushered in with the growth of corporate pension schemes.  Decades later these changes had turned the pension scheme into the dominant item on some companies' balance sheets. Other companies experienced even more dramatic consequences.

However, there is currently a second revolution underway amongst UK pension schemes, at least in the private sector.  This revolution will have a large impact on the corporate landscape.  To illustrate why, we begin with the number of active members of private-sector, defined-benefit pension schemes in the UK, i.e. working people accruing benefits,…

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Tags: pension schemes, bulk annuities, buy-out

Pension-fund socialism

(Sep 19, 2011)

In an earlier posting we looked at several examples where a pension scheme dominates the picture of the company's finances and value. A stark illustration of this lies in a revealing footnote in LCP's 2011 report on pension schemes amongst the FTSE-100 index of companies:

"Wolseley did not pay a dividend in 2010 or 2009 but contributed £42m to its pension scheme (2009: £47m). British Airways did not pay a dividend during its 2010 accounting year but contributed £364m to its pension scheme."

Lane, Clark and Peacock, Accounting for pensions 2011.

 

This situation is what Peter Drucker referred to as "pension-fund socialism".  This is where the bulk of the profits made by a notionally…

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Tags: pension schemes

Tail wags dog

(Jun 30, 2011)

Last week we looked at the odd situation whereby longevity risk is regulated more strictly in an insurance-company annuity portfolio than in a company pension scheme.  One argument for the different treatment is that the sponsoring employer is a source of ongoing financial support for the scheme.  This is not the case for annuities, where typically a single premium is handed over at outset and there is no further contribution from the beneficiary thereafter.

However, this argument only works where the scheme is small relative to the sponsoring employer. Table 1 shows a number of examples where the balance sheet of the pension scheme dwarfs the value of the sponsoring employer.

Table 1. Pension-scheme liabilities…

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Tags: longevity risk, pension schemes

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