You run a small business. You do right by your staff – paying them reasonably, training them and, crucially, enrolling them in your industry pension scheme and paying all the contributions that comes with. You do fine. You retire, or start to think about retiring on your own small pension.
Then, out of the blue, you get a letter telling you that interest rates are very low and pension liabilities are tough to finance. So you’ll need to send a cheque for a million quid to cover your share of your industry fund’s deficit. If you don’t, you’ll be personally bankrupted. Sounds too ridiculous to be possible doesn’t it? It isn’t. Just before Christmas, ex-pensions minister Ros Altmann pointed out that this is exactly what is happening in the plumbing sector.
Back in the 1970s employers started paying into an industry wide defined-benefit pension scheme – at one point there were 4,000 of them contributing to it. Then they started retiring and so stopped their payments into it. That was fine until 2014. The fund was fully funded (it had enough assets to meet all its long-term pension obligations) so any employer that wanted to could just shut up shop and be done with the whole thing. Not so today.
Thanks to the sharp fall in interest rates (and hence the projected future returns from the assets in the fund) the fund now has a nasty deficit (around £1bn). There are 400 employers left active in the scheme – and as the law stands, they are responsible for all of it, despite the fact that the majority of its beneficiaries have never worked for them or had anything to do with them. If they are still in business they can cross their fingers (all of them, plus their toes) that bond yields will rise and the problem will go away. But if they want to retire or just shut down their firm they must, as Altmann puts it “immediately help meet the notional cost of buying annuities for hundreds or thousands of workers who are nothing to do with them, as well as for their own few staff.”
If you are unincorporated – and hence have no limited liability provision – that makes you pretty much done for. “These people are effectively imprisoned by their pension scheme and face bankruptcy, the loss of their homes, their business and their whole life savings if they leave the scheme. Unlike BHS, these small employers cannot just sell their business to someone else and hope all will be OK. They cannot even transfer it from father to son. They cannot retire. They cannot move their employees to a new pension scheme. If they do any of these things, they will owe so much money that they face financial ruin. There is currently no way out for them and their families.”
So what can and should be done here? Altmann is after a change in the law – it is obviously unfair that any employer should be responsible for the pensions of other company employees (she covers this in her evidence here). But in the meantime it might be worth the trustees of the pension fund considering the manner in which their liabilities are calculated. The fund appears to be more diversified than most with equity and property holdings, so assuming that its long-term returns be as low as those on today’s politically overvalued government bonds seems a bit nuts. But either way, the ridiculousness of the entire situation is just one more signal telling us that either super-low interest rates or defined-benefit pensions – or more likely both – are on the way out.