Archive for July, 2010

Does the BBC have to act now?

July 28, 2010

Another interesting statement by Jan Killick in Ariel this week concerned whether the BBC really had to act now. The answer was carefully worded: UK funding regulations mean that the current actuarial valuation, at April 1st 2010, has to be finished before June 30th 2011, when the Scheme Trustees publish the results. I may be missing something here, but that seems like a very strong reason for getting on with the actuarial valuation. It doesn’t say anything about the timescale for needing to take action to reduce the deficit. Perhaps the valuation has to include a plan for reducing the deficit, but that would be strange; surely you need to know the full scale of the deficit before deciding on the plan of action? It is worth considering if one option we should be pushing for is a simple delay to wait and see what is the result of the next valuation.

The inflation question

July 28, 2010

More “answers to questions” in Ariel this week. Jan Killick (head of pensions) points out that there has never been a promise that benefits will increase in line with inflation. This is true of course; benefits increase in line with wages. But it’s also disingenuous. With the exception of the recent exceptional period, wages have increased each year, usually in quite close relationship to inflation.
Even without promotions there has been a reasonable expectation that wages – and with them linked pension benefits – will increase at least roughly in line with inflation. That’s the link we are losing. With the result that a few years of relatively high inflation – 5 or 6% a year for eg – will very quickly erode the value of pension benefits built up to date.

Frustrating figures

July 27, 2010

I’ve been trying to get to the bottom of the figures that are being used to justify all the key statements the BBC is making about the pension fund situation: that getting rid of the deficit will mean 10% of the licence fee going on pensions, what assumptions have been made about future market performance, what other options have been considered to try and reduce the deficit?

The result has been frustrating. None of my questions have really been answered.

But there have been some interesting discoveries along the way.

As far as I can see the entire case is based on a 1.5 billion pound deficit – the figure at the 2009 valuation. Since then the value of the pension fund has increased dramatically, so the assumption must be that the liabilities have also jumped – otherwise there wouldn’t still be a deficit.

Yet according to the documents I’ve been sent the demographic assumptions being made are “consistent” with those made in 2007. In other words despite all the words about demographics worsening the situation, this doesn’t seem to be a factor in the calculations. So what has changed? Either the documents I’ve been sent aren’t the right ones to answer the question I’ve asked, or there’s a degree of guesstimation going on.

Also, the assumption on market performance hasn’t changed (which is a surprise).

Risk

July 13, 2010

Interesting to see the Ariel article today about the options that the BBC considered for the pension scheme before settling on effectively closing it down. It’s heavily focused on two arguments; the level of the licence fee that the BBC pays into the scheme, and the reduction of risk. As I said in a previous post, there are assumptions here that need to be challenged. No-one knows the level of licence fee that licence fee payers would find acceptable for the BBC to spend on pensions. And the interests of licence fee payers have to be balanced against the BBC’s obligations to its employees. And as for risk, this is a deliberately chosen argument because once you accept as an objective that the BBC has to reduce risk, then only the BBC can be the judge of whether that has been achieved. It is purely qualitative. I think the BBC’s position is actually pretty outrageous on this question. They don’t want to reduce risk, they want to eliminate it, and transfer ALL the risk to us, by way of reduced payouts and a far less generous new scheme. Funding a pension scheme has always involved an element of risk. It is fundamentally wrong for the BBC to unilaterally decide to transfer all that risk to us.

The perfect moment…

July 12, 2010

The more I think about it the more it seems that the supposed £2 billion deficit is just a cover; the perfect cover to dismantle the final salary pension scheme. I’m sure that at a time when other parts of the public sector are about to have their pensions butchered the BBC is desperate to avoid being seen as an outlier. At the same time, the long term strategy – certainly outside of news – seems to be to have no permanent staff at all. In the meantime we have a split workforce on 3 different types of contract (staff, fixed term and freelance), with different types of pension provision. Pat Younge seems almost embarrassed by the idea that some have “better” pensions than others (ignoring the promise that was made when we signed up for the final salary scheme – and indeed the contributions we’ve made to the scheme over the years.) The senior management solution is to do away with the expensive “anomaly” – the final salary pension. But it is only an anomaly if you accept the language that is being used to justify the decision. There’s no reason why the BBC’s final salary scheme couldn’t be made affordable, albeit with some modifications. There has to be a will to do so, and I don’t think that will exists. We have to force it into existence.

Challenging assumptions 2

July 11, 2010

In my previous post I mentioned 3 assumptions that the BBC was encouraging us to accept. The second of them was the idea that in order to maintain the existing benefits the BBC’s contribution to the pension fund would have to rise from today’s 3.5% of the licence fee to 10%. And the the third was that the licence fee payer wouldn’t accept this.

I’ve yet to see the projections for the 10% figure, and it strikes me as a very conveniently rounded figure. I’m going to put a question in and I’ll report back on the response. But taking the 10% figure at face value for a moment there are several points to make. First, there was a long pensions holiday in the 1990’s when the fund was in surplus. Even accepting the BBC’s point that the fund was running at the maximum surplus allowed by legislation, it is still perfectly reasonable to ask for at least some of that money the BBC was able to keep during the holiday to now be put back into the scheme. Second, what would the effect on that 10% figure be if a more mixed strategy was followed? For example, capping benefits at £40K a year, increased contributions from members, and an increased contribution from the BBC?

(Update 12th July: The 10% figure hasn’t lasted long. In his reply to my post on his blog, Pat Younge says that the BBC would have to pay 6.5% of the licence fee to maintain existing benefits.)

The final assumption is that the licence fee payer won’t accept 10% of the licence fee being spent on pensions. It’s certainly true that the majority of the press will not like it – but they resent any money being spent on public sector workers. But the public? The assumption here is that envy conquers solidarity. Not proven. We still don’t know how the civil service unions will respond to reductions in their pensions. There could well be a wave of resistance to the unilateral rewriting of pensions benefits and therefore some sympathy for our predicament. No attempt has yet been made to explain why higher licence fee contributions to the pension fund might be justified. It’s possible to envisage a scenario where a combination of capped benefits, increased member contributions and a BBC contribution of say 5% of the licence fee is justifiable in the court of public opinion. Much is made by the BBC about putting the licence fee payer first, but actually there is a balance to be struck between the interests of the licence fee payer and the BBC’s workforce. There is no shame in vigorously asserting our own rights, whilst remaining mindful of the wider context in which we operate.

Fighting Back

July 5, 2010

The only serious way to defeat the BBC’s arguments for changing the pension scheme is to challenge the assumptions. The assumptions set the terms of the debate, and they are designed to severely restrict the possible outcomes, and create a sense of inevitability around the ending of final salary pensions.

Assumption 1: The BBC pension scheme will not be able to meet its future obligations unless the final salary link is scrapped.

Assumption 2: To cover the funding deficit in the scheme the BBC’s contribution would have to rise to 10% of the licence fee (from the current 3.5%)

Assumption 3: The licence fee payer won’t stomach the BBC’s contribution to the pension fund increasing to 10% of the licence fee

The first thing to say is that none of these have been proved. In fact, there’s been no attempt to prove them. They have simply been asserted, and we have been asked to accept them. The least we can do is insist on some justification, some evidence to support the assumptions.

In this post I’ll look at Assumption 1 (I’ll return to the other assumptions in later posts)

The last full fund valuation was in April 2009, when the fund’s value stood at £6.5 billion, the liabilities were £8.5 billion, and the deficit was £2 billion. But the annual accounts show that in the year to April 2010 the fund was valued at £8.2 billion. We don’t know yet what has happened to the liabilities, and the markets have fallen again since April 2010, but at the very least this suggests that the deficit will have reduced significantly since the 2009 valuation. We should therefore refuse to accept the £2 billion deficit as part of the argument; it is 18 months out of date and the fund’s value has improved significantly since then.

The BBC’s argument goes further however. They argue that the very volatility which has allowed the fund to recover is part of the problem! There is a risk that the markets could fall again. And indeed there is. But volatility has always been inherent in stock market investments, it is not a new invention. Is the BBC saying that in the past it ignored the possibility of market falls and ran the scheme on the assumption that the value of its investments would continue to rise indefinitely? And only now that the warning that comes with all financial investments (“your investment may go down as well as up”) has actually been demonstrated, have they woken up to the dangers? One assumes they are not quite so hopeless. Rather I think that in the past the view was taken that in the long run investments will rise in value, canceling out short term drops. Now it seems that the BBC has lost faith in the potential long term gains available through their investments, so they’re going to transfer out of stocks into “safer” bonds and guilts, and in doing so transfer the risk of underperformance to us by reducing pension payouts.

The key point here is that we have seen not a single figure to justify this position. We don’t know what the projected future returns are for the fund under different scenarios. We have no idea what projections of future liabilities are being used, and whether these have recently changed. We’ve not even seen any figures showing how much liabilities will be reduced by adopting the new scheme. In short, we are being sold a story, long on apparent common sense, but short on any facts. The only facts that are in the public domain suggest that the fund is not in as serious a position as the BBC is trying to make out. Rather the issue is to transfer risk from the fund to future pensioners. That is a choice that we do not have to accept.

PS Incidentally, there’s one argument that is being used that we can dismiss immediately. It is said that the changes to pension benefits are because people are living longer, and this increases the liabilities of the fund. No-one is denying that we are living longer. It’s just that this was the argument Mark Thompson used in 2006 to justify increasing staff (and BBC) contributions to the fund. It’s hard to believe that life expectancy has jumped so much that a scheme that had taken steps to deal with the issue just 4 years ago has now been caught out again. Clearly this is a smokescreen; an attempt to create a common sense rationale for changes that makes them seem inevitable, when under closer inspection the argument disintegrates.

Some pertinent questions

July 4, 2010

Has a pensions cap been considered? How much for example would a cap of £50K save – applied to those who have already taken their pension and those who have yet to take it?

Can we see the actuarial assumptions that have been made to justify the changes to the scheme? For example, how many people are expected to continue paying into the existing scheme? What are the predictions for the performance of the assets in the fund in future?

What happens if the markets recover and the pension fund moves back into surplus? What happens to any surplus?

How much money did the BBC (and the licence fee payer) save when the BBC took a pensions holiday (uprated for inflation)?

It’s currently estimated that about 3.5% of the licence fee goes on pensions. If the BBC were to fund the deficit it would apparently have to rise to 10%. But that assumes that the BBC covers the entire gap. Has any thought been given to a mix of increasing BBC and individual contributions? How big would individual contributions have to be if – for example – the BBC’s contribution rose to 7%?

For most people, isn’t it true to say that they would have been better off joining the Career Average Benefits scheme when it started in 2006 than staying with the so called “final salary” scheme? In other words, haven’t those of us who stayed in the DB scheme basically been mugged?

The 2010 valuation of the pension fund shows it at its highest level ever, jumping £1.7 billion pounds on the low point of 2009 to £8.2 billion. What effect has this had on the deficit of £2 billion? According to the BBC pensions report, liabilities in 2009 were £8.5 billion (actually a small reduction on 2008). With the scheme’s valuation in 2010 back up to £8.2 billion the gap was just £300 million. Reading the detail in the report the need to slash the scheme seems to be related to a change in investment strategy; they want to move out of equities (high risk) and into bonds and gilts, which they anticipate will have lower returns. In effect they’re saying they are spooked by 2009 and want to avoid that happening again.

What happens if you leave the BBC’s pension scheme entirely? Does the pension accrued to date increase in line with inflation?

BBC Pension

July 4, 2010

I’m using this blog to record my thoughts about the changes that have been announced to the BBC final salary scheme. These comments are only relevant if you’re on the defined benefit (DB) scheme.

In summary the changes are:

The final salary scheme has been effectively abolished

From now on our salary for pension purposes cannot rise by more than 1% a year (regardless of inflation), so the link to final salary is gone

Even 1% a year is not guaranteed. It’s not averaged out, so if you get 0% one year and 3% the next year, for pension purposes your salary rises by 1%

We still add extra years to our pensionable service. So if you have currently been in the scheme 20 years you’re current salary multiple is 20/60 multiplied by your salary today, plus however many 1% increments you get added between now and retirement. If you take your pension in ten years you’ll get half (30/60) times your salary today, plus however many 1% increments you’ve managed to add before retirement.

BBC Pension age remains at 60

For someone on a £50K salary, each extra year increases your pension by £833 per annum. At the same time your pension contribution on a currently salary of £50K is about £3500. In theory if you take your pension for 5 years you’ve got your money back, but of course that doesn’t account for inflation. Your £3500 contribution will in all likelihood have much great purchasing power at the time you pay it into the scheme than at the time when you draw the pension

The new defined contribution (DC) scheme will preserve the value of your existing pension, and increase it in line with inflation. But you will no longer add years to the final salary, so it is effectively frozen in value (but at least inflation protected). Any increase in pension beyond the value of what you have now will have to come from the DC scheme