Could it happen again?
March 5, 2012
On 30 March 2001 the BBC carried an article discussing the Department of Trade report into the Robert Maxwell affair. This involved Maxwell taking over £400m from his company’s pension fund, leaving 32,000 pensioners fearing for their future financial security. The BBC asked ‘Could it happen again?’
11 years later on 4 March 2012 the Sunday Times Business section leads with the headline ‘Osborne grabs £28bn windfall.’ This is the plan by the Conservative government to take over the Post Office pension fund. According to the Sunday Times, the pension fund has a net deficit under current accounting rules (as applied in the private sector) of £4.6bn, but for government accounting purposes (which it attributes to ‘quirks’) the liabilities of some £32.6bn will not appear as liabilities on the government’s books. The assets, however, of some £28bn, will be regarded as a ‘surplus’ and will be liquidated ‘creating a new pool of cash for the chancellor to play with.’
Apparently some conservatives would like the money to be used to invest in infrastructure projects, such as roads power stations and railways. This is despite the fact that pension funds typically do not invest in such schemes until they are completed, because of the high risks involved.
When the last labour government proposed doing much the same thing with the Post Office fund, the then conservative shadow business secretary Alan Duncan was quoted by the Guardian in 2008 as follows:
Their plan to steal the pension assets to help reduce their borrowing figures while taking out a massive mortgage to cover Post Office pension liabilities for 50 years is nothing more than a massive accounting scam.
Not only will this plan pile debt onto debt for families and businesses, but it will completely remove the Royal Mail’s commercial incentive to modernise and reduce its deficit. This dangerous plan must be resisted.
It’s clear that removing the assets of a scheme and spending them on reducing debt or on infrastructure leaves the government exposed to a much higher liability for pensions in the future. This increases the risks not only for members of the Post Office scheme but for all for public sector workers.
Additional measures may have to be taken in future to reduce the level of liabilities faced by the government. For example:
- Increases in pensionable age have already been introduced and the need for further increases could be accelerated by the additional liabilities taken on.
- The change from the use of the RPI to index pensions to the CPI has already reduced the liabilities. Significant increases in the liabilities (albeit off balance sheet) could conceivably lead to extreme measures such as removing indexation of pensions altogether.
Unless the assets of the scheme are ringfenced and not used for high risk projects such as infrastructure projects (which inevitably seem to overrun their budgets) then members of the scheme will be subject to much greater risk of their pension entitlements being eroded in the future. Alternatively the taxpayer may face much increased risk of having to bale out the government by having to pay increased taxes to cover liabilities that are uncovered and potential losses on high risk projects.
This is not how pensions are meant to work. Liabilities should not be funded on a pay as you go basis, but should be prudently funded. If infrastructure investment is such a good thing why are the banks and the private sector not rushing to invest? The answer is simple – it’s just too big a gamble. Too often, like defence contracts, budgets are overrun and losses incurred, which the taxpayer has to fund.
As the Sunday Times article notes, government accounting means that the liabilities do not appear on the government’s books and the assets are treated as a surplus. The accounting standards used by the private sector in the UK require that the assets and liabilities of the scheme are taken into account with the net surplus or deficit recorded on balance sheet. By contrast the government’s accounts exclude the pensions liabilities which will have to be met in the future. According to the ‘Whole of Government Accounts’ for 2010 which reconcile the government accounts with the accounting standards referred to above, these liabilities come to £1,132bn. The government accounts include only the cash payments and receipts associated with these pensions, and, therefore, do not show the £1,132bn. This is cash accounting which, in the private sector, went out with the Ark.
The government must consider carefully the risks to both the taxpayer and to the members of the scheme before applying any of the assets of the scheme for purposes other than funding the liabilities that the government (and the taxpayer) are to assume.