BA Pension Scheme


F

Fergus O'Rourke

I see that this scheme has a deficit of £1.5 billion.

How was this allowed to happen ?

Did the company take a "contribution holiday", or worse, withdraw "surplus"
from the fund ?

Why have contributions not been increased ?

Do we blame the actuaries or the executives ?
 
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M

Mitchum

I see that this scheme has a deficit of £1.5 billion.
How was this allowed to happen ?

Did the company take a "contribution holiday", or worse, withdraw
"surplus" from the fund ?

Why have contributions not been increased ?

Do we blame the actuaries or the executives ?
Blame the old employees for living too long. Selfish bastards.
 
T

Tim

I see that this scheme has a deficit of £1.5 billion.
On what basis? - Ongoing? / Buy-out? [MFR (or SFO) ?!] ...

How was this allowed to happen ?

Did the company take a "contribution holiday",
or worse, withdraw "surplus" from the fund ?
Or was the valuation basis simply changed?

Why have contributions not been increased ?
Perhaps they were already sufficient?

Do we blame the actuaries or the executives ?
Or blame the government/regulators (DWP) changing imposition of reporting
bases?
 
R

Roland Watson

They probably thought prior to 2000 that 8% -10% returns on the stock market
were forever and blew the surplus accordingly.
 
T

Tim

They probably thought prior to 2000 that 8% -10% returns on
the stock market were forever and blew the surplus accordingly.
Absolutely not - the actual level of future returns are (generally)
irrelevant in pension scheme valuations.
Because liabilities are typically linked to either future SALARIES or the
RPI, what actually matters is the DIFFERENCE between future returns & future
salary increases, and/or the DIFFERENCE between future returns & future
inflation increases.

When returns fell after 2000, so did salary increases & inflation. Hence
the *differences* are actually still not much different from previously, and
the drop in investment returns / salary increases / inflation after 2000 is
a "red herring"!!
 
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R

Roland Watson

I think a 50% drop in the stock market between 2000 and 2003 is not
"irrelevant". Salaries have increased year on year albeit slowly as you say.
Even if salaries only increased a few percent in that time, it is a lot to
catch up.

Of course, it also depends what you mean by "future returns", 10, 20 or 30
years?
 
T

Tim

I think a 50% drop in the stock market
between 2000 and 2003 is not "irrelevant".
It is when you are only looking at the future!

Salaries have increased year on year albeit slowly
as you say. Even if salaries only increased a
few percent in that time, it is a lot to catch up.
But in the scale of the lifetime of a pension scheme, even a 50% drop could
be "caught up" by just (say) 1.75%pa over 40 years.

Of course, it also depends what you mean
by "future returns", 10, 20 or 30 years?
Pension schemes usually have liabilities that stretch over much more than
even 40 years.
 
R

Richard Buttrey

They probably thought prior to 2000 that 8% -10% returns on the stock market
were forever and blew the surplus accordingly.

Not necessarily either. The biggest culprit was the government in the
form of the Inland Revenue.

No matter how public or employee spirited a company was, the IR did
not allow peniosn funds to exceed a certain percentage of their
actuarial pension liability. I think the maximum funding allowed was
107%, but I could be mistaken by a percentage or two. In the good
years during the 90s, when markets were booming, employers found they
needed to either take pensions holidays or give additional benefits to
their employees and pensioners.

Looking back now, it's clear that this was an extremely short sighted
rule. At the very time when pension fund valuations were relatively
large because of the stock market levels, companies were forced to
take pension holidays and avoid over-funding, when they should have
been pouring in more money, ready for the rainy days.


Rgds


__
Richard Buttrey
Grappenhall, Cheshire, UK
__________________________
 
T

Tim

At the very time when pension fund valuations were relatively
large because of the stock market levels, companies were
forced to take pension holidays and avoid over-funding,
when they should have been pouring in more money, ...
Pouring in more money just when the stock market is overheated, ie when
prices are inflated? Isn't that exactly the *wrong* time to buy?
 
T

tim \(moved to sweden\)

john boyle said:
What makes you think the pension fund had top buy shares?
According to the managers of my small group fund "because
otherwise they would be accused by their auditors of not
'investing sensibly'", it was a bit more than that but I think
you get the picture.

During 2001-2 (I think) when it was obvious to most
people that the market still had a way to fall, they refused
to move the bulk of the funds into cash because they had
a duty to maximise the returns of the fund and by being in
cash they could not prove that they were doing this. In cash
the up side was limited and they were potentially missing out
on double digit growth in shares, the fact that the downside
was zero and that during the period there was likely to be
a decline in share prices did not enter the equation.

I know that this sounds like an attempt to blind me with
science to make me go away happy, but the discussions
that we had together with the actions that were taken to
resolve the situation to my satisfaction, suggest that he
believed that it *was* his obligation to remain fully in
equities.

tim
 
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J

john boyle

"tim (moved to sweden)" said:
According to the managers of my small group fund "because
otherwise they would be accused by their auditors of not
'investing sensibly'", it was a bit more than that but I think
you get the picture.

During 2001-2 (I think) when it was obvious to most
people that the market still had a way to fall, they refused
to move the bulk of the funds into cash because they had
a duty to maximise the returns of the fund and by being in
cash they could not prove that they were doing this. In cash
the up side was limited and they were potentially missing out
on double digit growth in shares, the fact that the downside
was zero and that during the period there was likely to be
a decline in share prices did not enter the equation.

I know that this sounds like an attempt to blind me with
science to make me go away happy, but the discussions
that we had together with the actions that were taken to
resolve the situation to my satisfaction, suggest that he
believed that it *was* his obligation to remain fully in
equities.
Well 'he' is definitely out of step with his fellow pension fund
managers and I suggest you sack him and get somebody else. The famous
'nestle' case told trustees that leaving a big fund is cash for a long
period was negligent, but to interpret that ruling in the way you quote
shows them either to be fools or that they think you are.

Two examples of what the others are/were doing are : Boots' staff
pension fund, for example, switched *entirely* into Fixed Interest at
around the same time. The Mineworkers Pension Fund is invested in many
other asset classes than equities including items of art.

In summary, investing in a pension fund does *not* mean that you are
investing in the Stock Market.
 
T

Tim

... Boots' staff pension fund, for
example, switched *entirely* into
Fixed Interest at around the same time...
Yes, I remember that well - it was widely
thought to be a very risky strategy at the time.
Fortunately for Boots, they were lucky!
 
T

tim \(moved to sweden\)

john boyle said:
Well 'he' is definitely out of step with his fellow pension fund managers
and I suggest you sack him and get somebody else.
Not within my gift (then).
The famous 'nestle' case told trustees that leaving a big fund is cash for
a long period was negligent, but to interpret that ruling in the way you
quote shows them either to be fools or that they think you are.
We had a long discussion. I made it clear that I didn't accept
his view of his obligations. He knew that I wasn't a fool.
Two examples of what the others are/were doing are : Boots' staff pension
fund, for example, switched *entirely* into Fixed Interest at around the
same time.
They kept on asking if I had been motivated by the Boots
pension fund decision. I was actually unaware of this and
had decided for myself that being in equities with a largish
fund was silly.

tim
 
J

john boyle

Tim said:
Yes, I remember that well - it was widely
thought to be a very risky strategy at the time.
Fortunately for Boots, they were lucky!
I dont think it was luck, they got want they intended. They had
performed an actuarial review and found the fixed total return from the
Fixed Interest portfolio was sufficient to meet their future
liabilities.
 
J

john boyle

"tim (moved to sweden)" said:
Not within my gift (then).


We had a long discussion. I made it clear that I didn't accept
his view of his obligations. He knew that I wasn't a fool.
He was then!
They kept on asking if I had been motivated by the Boots
pension fund decision. I was actually unaware of this and
had decided for myself that being in equities with a largish
fund was silly.
And fair enough. They dont sound up to much! Why not sue the trustees?
 
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T

Tim

I dont think it was luck, they got want they intended.
They had performed an actuarial review and found
the fixed total return from the Fixed Interest portfolio
was sufficient to meet their future liabilities.
How did they know what future inflation & salary increase rates were (and
still are in the future) going to be?
 
T

tim \(moved to sweden\)

Tim said:
How did they know what future inflation & salary increase rates were (and
still are in the future) going to be?
Surely these are reasonably closely linked?

tim
 
T

Tim

Surely these are reasonably closely linked?
Equity returns, salary increases and inflation rates *are* all closely
linked - that's the point.
[They vary, but generally always in line with one another.]

Hence, the liabilities are **not matched** very well at all by the "
**fixed** total return from Fixed Interest portfolio "...
 
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T

Tim

I would imagine in exactly the same way as any
other statutory actuarial review of a pension ...
But that's not possible!

The usual way is to use the *difference* between future assumed investment
return and future assumed salary increases -- and similarly the *difference*
between future assumed investment return and future assumed inflation
increases.

That's because equity returns tend to be 'real' - and hence move with the
level of salary increases / inflation.

But if you are "locked-in" to a particular fixed return on gilts, that
wouldn't be possible...
 

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