One of the biggest conundrums in the UK market at the moment is the failure of UK companies to invest.
Last Saturday, Stephanie Flanders, now of JP Morgan, took to the pages of the FT, to note that "investment now accounts for a smaller share of the UK economy than at any time in the last 30 years and is five percentage points of GDP lower than in the US."
She reckons that can change if businesses "have confidence that the UK is on the road to recovery." We wonder if it is that simple.
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Anyone who found their eyes wandering to the words in the column next to Stephanie's that day might have found evidence that it isn't. That one was about Detroit and referred to the "astonishing" fact that the bankrupt city still offers defined benefit pension plans "costly pensions that are determined in advance by employees earnings."
In the UK, we know these mostly as final salary pension schemes what you get depends not on how much money you have saved and the investment returns you have made on them, but on your salary at retirement. The key here is that these are costly, (very, very costly), and that an awful lot of the UK's older companies still run them.
With that in mind, consider the results just out from a survey by the CBI and Standard Life. It covered 226 chief executives and board members in companies with £360bn of pension funds to cope with.
84% of them are worried about the ongoing funding of the scheme. 88% are concerned that their contributions to their funds are going to have to rise when they make their next funding agreement with the trustees of their pension funds. 70% of them say that the cost of their defined benefit schemes is having an "impact on business investment". That number rises to 78% if you only look at manufacturers.
226 companies might not be that many, but these results are still shocking and chime well with several conversations I have had recently with business owners.
They feel that they can't invest. Why? Because they either have to come up with more cash to fund their pension schemes or they are worried they will soon have to. How did we get to this point?
Neil Collins summed it up pretty well in a recent FT column. In the good times, huge extra obligations were heaped on to the schemes "almost casually" by government after government (1995 being a turning point see this bit of the pensions act).
Then long-term interest rates collapsed, pushing up the present value of the future liabilities: the lower a return the market is giving you, the more money you need in the first place to be sure of being able to pay your pensioners later.
So, the more interest rates fell, the more pension funds fell into technical deficit and the more money directors were obliged to shift from investment to pension funding* (a 1% fall in the discount rate can raise your liabilities by over 20%).
By October this year the defined benefit pension liabilities of the companies in the FTSE 350 was equivalent to some 35% of the market capitalisation of those companies. That's a record high by a long way.
Regular readers will know that we think there are many reasons to normalise interest rates. This is another one. Super low rates are supposed to encourage companies to invest. But if they have a defined benefits pension scheme, it does precisely the opposite. That's bad for all of us. The less investment we have, the less likely we are to get the sustainable recovery we so badly need.
*Many directors for firms with pension deficits (that's over 80% of those with defined benefit pension schemes) will tell you that they feel that the pension trustees rather than them actually run their companies they and the trustees are supposed to "work together to manage and balance the risks to their business and the scheme".
But rare is the pension trustee who considers it a good idea to invest spare cash (something that is obviously risky) rather than shovel it into the pension scheme. The pension regulator does have a relatively new objective to minimise the adverse impact on a business from its deficit, but as the CBI puts it, this "has yet to have a positive impact."
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