Port Talbot is a message to the Bank of England
If the Bank of England wants to avoid another Port Talbot, it's going to have to raise interest rates, says Merryn Somerset Webb.
In my piece on Port Talbot yesterday, I mentioned the whopping pension deficit as part of the problem. It seems to be a very big part of the problem: the current shortfall looks to be around £485m, but, says the Times, the rising life expectancy of the scheme's 100,000-odd members means that it is forecast to end up at over £2bn. To close that "will require annual contributions of about £200m a year for 15 years." Too much for any buyer to contemplate taking on.
Tata hasn't been ignoring this problem: it has put £90m into the scheme over the last three years. However, the deficit has just kept growing. Why? This brings us to much the same thing that most major financial problems now seem to bring us to: super-low interest rates.
I've written about this before here and here. But the key point is that pension trustees tend to use the rates on government bonds as proxies for the returns they will make on the assets they hold in their funds (bonds are thought to be the only matching assets for pension liabilities). If rates are where they are now 0.5% the present value of the assets is going to be significantly lower than when they were, say, 5%. The lower rates go, the higher pension deficits get.
So, Tata isn't alone in its pension problems: the latest reports on the matter suggest that the UK's largest 350 companies have a combined deficit of £64bn. And it isn't just big companies that are being dragged down by this: watch my interview with Gervais Williams this week, and you will hear him talking about a company that got a great deal on an acquisition. Its target the main business of which was profit making had ended up in administration as a direct result of being unable to fund its pension scheme.
The authorities are in a tricky situation here. They need the pension funds to keep thinking that bonds are the only game in town for them (someone has to be prepared to keep buying the things at these low yields). But they clearly don't want that to mean the total collapse of the UK's industrial base. So what do they do? The obvious answer is to put up interest rates. Port Talbot is just one more message from corporate Britain to the Bank of England: low rates aren't working anymore.