For those of you who want more information on the kind of figures that justify my previous post…

With permission from the writer, David Gallagher, below are exerts from a letter he’s written to Mark Thompson laying out the figures that justify keeping the current pension scheme. It’s dense, but worth following the argument – the BBC is relying on us not having the gumption to look behind their arguments.

**Dear Mark**

**At this challenging time, I’d like to propose an idea that will save the BBC at least £10 million per year.**

**The idea is this: to retain the existing BBC Pension Scheme, exactly as it is, including allowing new joiners into the Scheme.**

**Here’s how the calculations work out.**

**The BBC currently pays £150 million p.a. in pensions contributions.**

*Ariel* stated on 5 October that the latest pensions proposals would require BBC contributions of £260 million p.a. [http://explore.gateway.bbc.co.uk/Ariel/docs/Ariel5thOctober2010.pdf, p. 3]

**Below is a proposal to fund the existing Scheme for the next 50 years or more that would require BBC contributions of £250 million p.a.**

**This is £100 million p.a. more than currently, but £10 million p.a. less than the latest proposals.**

**The Pension Scheme faces two problems: the deficit and the increase in life expectancy. These are costed as follows.**

*Deficit*

**Let’s take a worst-case scenario and suppose it’s £2bn.**

*Life expectancy*

**Government statistics show that since 1980, there has been a rise in life expectancy of appoximately one year every five years. Government projections for the future take this as their ‘high’ estimate – so, another worst-case scenario. [Figures are here: http://www.statistics.gov.uk/statbase/Product.asp?vlnk=15098]**

**In Ariel on 29 June Zarin Patel stated: ‘For every one year increase in life expectancy the BBC has to pay £35m extra into the pension fund.’ [http://explore.gateway.bbc.co.uk/Ariel/docs/Ariel29thJune2010.pdf, p. 10]**

**Therefore, using the government’s ‘high’ estimate, the BBC will have to contribute an extra £35m in the next 5 years, plus an extra £70m in the following 5 years, plus an extra £105m in the following 5 years, and so on.**

*The proposal*

**1. Use assets from TV Centre and Worldwide to cover some of the deficit. Figures as high as £1.4bn have been quoted for the value of these assets, but it is recognised that given the problems of valuing companies and property, the Trustees may not accept a valuation anywhere near that high. Pensions discussions in August suggested that these assets might be used to cover ‘25%’ of the deficit – e.g. £400m if the deficit is £1.6bn, but £500m if the deficit is £2bn. Assuming, once again, a worst-case scenario suggests the adoption of the lower figure of the two just quoted, ie £400m.**

**This reduces the amount needed to pay off the deficit to £1.6bn.**

**2. Negotiate a 20-year repayment period for the deficit. [NB this is only a necessary part of the proposal if the deficit really is as high as £2bn. If it’s £1.2bn, for example, the standard repayment period of 10 years would achieve the same result.]**

**3. Commit an extra £100m p.a. of BBC contributions to the Pension Scheme. [So BBC contributions would rise, as initially stated, to £250m p.a.]**

**This has the following results:**

**Paying off £1.6bn over 20 years costs £80m p.a. Thus, each year for the next 20 years there would be an additional £20m going into the Scheme to cover the life expectancy increase.**

**At the 20-year point, the deficit would have been paid off, and £400m would have been paid into the Scheme to cover the life expectancy increase (which more than covers the £350m extra required by this point to cover the life expectancy increase).**

**After the 20-year point, since the deficit has been paid off, the full £100m extra being paid into the Scheme can be used to cover the life expectancy increase.**

**By the 40-year point, the total amount paid into the Scheme to cover the life expectancy increase will be £400m from the first 20 years plus £2bn [=20x£100m] from the following 20 years, ie a total of £2.4bn. This is well ahead of the £1.26bn extra required by this point to cover the life expectancy increase).**

**By the 50-year point, the total amount paid into the Scheme to cover the life expectancy increase will be £3.4bn. This is almost £1.5bn ahead of the £1.925bn extra required by this point to cover the life expectancy increase.**

**So this proposal – based on a series of worst-case assumptions – would provide a large contingency (£1.5bn) in case of future problems. If, for example, the deficit is well below £2bn (which, as we know, is extremely likely) the figures would work out even more favourably.**

**It is therefore extremely likely that BBC contributions could fall below the assumed £250m p.a. in future.**

**Two further factors would lead to additional savings: retaining the existing Pension Scheme instead of introducing new schemes will mean significant administrative savings; and by the 50-year point the cost of providing benefits will have fallen significantly because most Old Benefits members will be dead and Career Average members will make up a significant proportion of beneficiaries with pensions in payment.**

**So this suggests that in the long term this proposal would save the BBC considerably more than £10m p.a. as compared with the current proposals under consideration.**

**Since all calculations are given in today’s money, you’ll be aware of an underlying assumption, which is that the Scheme’s investment returns need to keep pace with pay rises/inflation. This highlights an important feature of the proposal, which is to keep the existing Scheme open to new joiners. Closing the Scheme to new joiners would create a new financial problem for the Scheme, by starving it of new money (since there would no new contributions from either new joiners or the BBC) and thus encouraging lower-risk, lower-yield investments. Keeping the Scheme open to new joiners will keep the Scheme healthy by ensuring a continuing flow of new money into the Scheme.**

**I hope that you will recognise the advantages of this proposal, both financially and in terms of the immeasurable fillip to BBC staff morale, and that you will move swiftly to adopt it.**

**With thanks in anticipation**

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