Why your pension problem will soon be accounting history (and why that’s good)

I am mildy obsessed with pension deficits at the moment. I am quite sure that the problem is bad, but not as bad as the industry insists on thinking that it is. I am also sure that the result of the “awfulising” of the deficit problem is doing horrible things to the economy.

We would be better off focusing on supporting companies so that they are healthy enough to pay their pensions as they go, rather than insisting that all pension funds are fully funded all the time. The future is an uncertain place, where we will need healthy companies more than healthy pension funds.

So some good news. A few weeks ago AJ Bell came up with some numbers on deficits in our very big companies that made for miserable reading. I quoted them. But I then got an email from Shell asking me to look more closely at their pension arrangements. Their company report suggests a deficit of over £8bn. Real money.

But do as Shell ask (look closer) and you will see that Shell’s UK defined benefit fund itself is in surplus. The £8.5bn is the number for the ‘global’ deficit, and is accounted for by two main factors: healthcare costs for US fund members and the fact that “tax rules in some places mean that it is better for some pension commitments to be underfunded”.

The UK fund – the details of which you can find here – is in fact in mild surplus (104%) rather than deficit. It is also fairly sensibly invested (a balance between equities and bonds as opposed to the usual huge overweight in bonds) and its report for members makes it refreshingly clear that any discussion about surpluses or deficits is only ‘technical’ and ‘actuarial’ given that there is no intention to wind the fund up.

So there is £8.5bn worth of pension ‘deficit’ you don’t have to worry about at all.

Finally, a point from the Shell report that is worth noting for the simple reason that it reminds us that the defined-benefits panic you see around you is a medium-term problem at worst.

The Shell UK scheme has just over 42,000 members in total. 9,000 of those are ‘deferred’ (so not working at Shell any more, but still in line for benefits on retirement) and 4,500 are ‘active’ (working at Shell and in line for a DB pension). But all the rest (some 29,000) are already retired and getting payouts. Give it 20-30 years and the whole defined-benefit pension saga will be nothing but super dull seeming accounting history.