The biggest shock of last week in the pension’s world came with the announcement from Lufthansa that their defined benefit pension scheme deficit had now gone over €10 billion. This is a frightening figure – to put it in context it is up 41% since the end of 2014 and it equals the entire national debt of Bulgaria. While some of this increase is due to the current low-interest rate policy of the European Central Bank and will be ameliorated over time, nevertheless it is still a huge problem for the company which posted an operating loss of €133 million in the first quarter of this year.
The situation is no better for the larger companies in the UK. The total deficit for the FTSE 100 pension schemes was estimated at over £80 billion at the end of 2014 and with 30% of them about to begin their triennial financial health checks on their schemes; experts expect this figure to rise dramatically. This is likely to put pressure on the three remaining FTSE 100 DB schemes to close i.e. Morrisons, Diageo and Johnson Matthey. All the others are closed to new entrants and 32% are closed to future accrual, an option which is likely to be increasingly taken up as firms look to limit their exposure to the ever-increasing liabilities being created from the increased ageing of the UK population. In fact a wider look at the situation in the UK shows how bad the situation is. The aggregate deficit of the 6,057 schemes in the PPF 7800 index was estimated at £292bn at the end of March 2015, which is £50bn greater than Greece’s national debt that is posing an existential threat to the Eurozone.
The need to service such huge deficits in the pension schemes is putting a huge drag on industry worldwide. In effect, they are all still paying for work that was done possibly decades ago as the cost of each employee they had that is now retired is still rising. This means that the labour costs for work carried out in the 80s and 90s was grossly understated as they are effectively still paying for that work at the moment.
Constant grappling with these liabilities by CFOs is almost certainly putting a brake on the investments of these companies in new products, processes and people, and almost certainly causing some of the brake on the productivity increases so desperately needed in industry.
These figures bring into the open what we already knew deep down; DB pension schemes are a glorified Ponzi scheme which worked well while employee numbers and firms were constantly growing but are no longer sustainable in the 21st century. We need to accept reality and acknowledge that DC pension schemes are the only way forward. Rather than politicians bemoaning the fact that DB schemes are closing, they should accept the reality that the only realistic way for employers to participate in pension saving for their employees is to contribute to DC schemes on their behalf because it is a manageable liability that can be handled as part of the operational costs of the company rather than throwing unknown levels of liability upon future shareholders.
Clearly, this is all well-known by the government. The only problem is that most of the advice that government receives comes from people within the public sector who have the same schemes, only instead of having vocal shareholders to assume the liability, the government just have the electorate who remain sadly in ignorance of the huge potential pay-outs they will have to make in the future.
The plight of Lufthansa and all the other large companies who are currently struggling to bail out their pension funds is nothing compared to the OECD taxpayers in 2050 as they will struggle to fulfil the commitments of long-gone western governments in terms of public sector pensions.
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1. www.pensionprotectionfund.org.uk March 2015.