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The Ayatollah Buggeri

Pensioners One, Bankers Nil

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Telegraph:

Members of bankrupt pension schemes have been handed a near-blanket guarantee by a radical court ruling that pushes them right up the creditor hierarchy but has been branded "catastrophic" for banks and companies.

In a fundamental shake-up of the corporate debt structure, pension trustees will be able to demand a lump-sum payment from administrators of a failed business ahead of all lenders bar those backed by property assets. Even the administrators will be lower in the pecking order.

Before the ruling, pension claims ranked beneath the riskiest unsecured loans, potentially robbing workers of their retirement income.

In a packed courtroom at the High Court on Friday, Mr Justice Briggs ruled in favour of The Pensions Regulator in its bid to recover funds from Lehman Brothers and Canadian telecoms firm Nortel for the 43,000 members of the insolvent companies' pension schemes.

The administrators of Nortel and Lehman, which went bust with UK pension deficits of £2.1bn and £148m respectively, were contesting the regulator's decision to issue a "Financial Support Direction" (FSD) requiring them to strike an agreement with the pension trustees before disbursing funds to creditors.

Under the current rules, if no agreement is struck the regulator imposes a "Contribution Notice" (CN) demanding the administrator make a payment to the trustees. In a ground-breaking judgment, Mr Justice Briggs ruled that the CN would qualify as an "administration expense" – meaning it must be paid above all but "fixed asset" creditors, even before the administrators take their fees.

"It's a shock ruling, everybody I have spoken to has got their mouths wide open," said Nick Moser at law firm Taylor Wessing. "Administrators will be discouraged from implementing rescues because super-priority for pension schemes could wipe out any return for any other creditor."

Allen & Overy restructuring partner Jen Marshall added: "This will have huge implications for the restructuring industry. It is potentially catastrophic, the decision is totally untenable. For banks and companies, it is an impediment to the rescue culture."

Jonathan Land, business recovery partner at PricewaterhouseCoopers, who advised Nortel's pension fund trustees throughout the two-year case, warned that companies with large pensions deficits, such as British Airways, may find it harder to raise funds as a result.

"This is great for pensioners but will have huge implications for the banks," he said. "Banks will have to wake up to the importance of the pension creditor. They will have a lot more risk to contend with. They should be wary of companies with huge pension liabilities."

Mr Justice Briggs said he regretted having to make the ruling, which he blamed on "a legislative mess". "Parliament might wish to consider a suitable amendment," he added.

"The conferring of super-priority as expenses on the financial liabilities arising from the FSD regime is both potentially unfair to the target's creditors and inconsistent with a decision taken in 2004 not to elevate employees' pensions claims above the claims of those creditors."

The regulator, whose role is to protect both pension scheme members and the lifeboat – the Pension Protection Fund – welcomed the ruling.

The administrators are expected to appeal.

Interesting how the Telegraph spins this as a catastrophe (for companies with significant pension liabilities) rather than good news for pensioners and savers in pension funds. I agree that the implications are potentially serious for the viability of companies with large pension deficits (given that banks will now be more reluctant to lend to them), but the savers in those schemes are going to have to be supported in old age one way or the other, and anything that closes off the possibility of offloading that entire bill onto taxpayers has to be a good thing.

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Won't be long before the banksters (financial terrorists, or suicide bankers, as Max Keiser likes to say) lobby Government to get a suitable law change pushed through.

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Yet another daft decision by a confused person earning far too much money for anyone's good.

Does this judge have no consideration on the impact on other businesses? Businesses need credit to work, and an operating business is something that creates wealth and makes us all a little bit richer. Now thanks to the wonder of defined benefit pension schemes, we not only have cases where the business has to feed something that is unproductive (you may not like to admit it, but pensions are a cost with no benefit to those paying them) to make good on any deficit, which make the business less credit worthy, but now we have a rule that puts the pension scheme at the top of the creditors pile should a business go bust.

Well if I were forwarding credit to a business, I wouldnt do it to one with a defined benefit pension scheme unless I was certain that the scheme wasnt in deficit, or the business was so strong that I wouldnt need to worry about a bankruptcy event. If I wasnt sure about this, I would be sure of losing my money. There are though, many businesses with these schemes that are in deficit, and the businesses are financially weak particularly when the burden of the pension scheme is added in. These businesses though, are productive and are good for the economy.

Now however, they are going to find credit more scarce and more expensive. Some most likely, will fold, not due to the underlying profitability of the business, but due to ballooning pension liabilities and daft new laws made up by judges that place burdens on these businesses that mean that they can no longer compete.

Eventually expect these businesses to be replaced by ones that do not offer such good pension schemes, and expect too a greater burden on the taxpayer. The goose that lays the golden egg for these pension schemes will be strangled by the pension trustees and their wonderous new law, causing them in turn to seek compensation for their own mis-guided actions from the only pocket big enough to pay, the taxpayer.

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Hmm. Well, if there is any money left after the shysters have bankrupted whatever trust or fund, it should rightly go to the pensioners.

Unfortunately, when the money has been stolen, it doesn't come back.

Pensioners are fvcked here anyway, there's simply not enough people paying in to support the retiring generation.

It all boils down to demographics, and the un-reported crisis currently under way.

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So we've got a Judge here who's first name is 'Justice'. Yeah right. Pull the other one.

It's common practice for judges to use the term Justice in front of their name, it's not their first name. I'm surprised you never read that before.

As for the decision, this seems a very fair decision to me, sound businesses have nothing to fear, while it's only right that pension funds should come first in case of a bakrupcy.

IMHO pension funds should always be FULLY FUNDED anyway, with the funds held in separate accounts from the business.

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Pensioners are fvcked here anyway, there's simply not enough people paying in to support the retiring generation.

It all boils down to demographics, and the un-reported crisis currently under way.

You are confusing the state pension with company pensions. There is no reason why a company pension should suffer from demographics.

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Hmm. Well, if there is any money left after the shysters have bankrupted whatever trust or fund, it should rightly go to the pensioners.

Unfortunately, when the money has been stolen, it doesn't come back.

Pensioners are fvcked here anyway, there's simply not enough people paying in to support the retiring generation.

It all boils down to demographics, and the un-reported crisis currently under way.

cashinmattress,

great post, it gets to the essence of the problem. The mathematics of the demographics show us that pensioners will get poorer.

What is important is that policy makers accept this, and do not try to compensate for the market driving pensioners income down, or else what will happen is we will over tax the young and our businesses, and make them bust in a futile attempt to provide more for the pensioners. Intervention such as that, and also decision such as this judge has made, will destroy the wealth creating capacity that the nation has and needs to be able to provide pensioners with any decent sort of income at all.

As for the money being stolen, I am not so sure. When these funds go bust, it is normally due to the unexpected longevity of scheme members, and companies foolishly promoting workers just before they retire, that sort of thing. When the scheme goes bust, it is normally because those who retired first end up drawing out much more than was expected. So the worst culprits for taking money from these funds are the oldest pensioners.

When schemes collapse, leaving those working wiped out, I really do feel angry. What should happen is that all member of the scheme, both those retired and those working, should have the value of their pensions reduced pro-rata. Instead we get retired members protected 100% if the funds are there, leaving scraps for those still working. This is fundamentally wrong. The law should be changed on this. If those receiving pensions already take a 15% cut on their pensions say, it wouldnt be the end of the world for them. That would give some sort of pension to those still working to look forward too. This solution would be far more cost effective than the PPF, which I envisage is going to be dolling out pittances to people in the near future.

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IMHO pension funds should always be FULLY FUNDED anyway, with the funds held in separate accounts from the business.

+1.

And a company that is not solvent shouldn't be doing business.

It might well mean that company pensions get smaller and smaller.

Although boss man pension being protected sounds like a swizz for the workers.

Edited by SarahBell

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You are confusing the state pension with company pensions. There is no reason why a company pension should suffer from demographics.

Actually there is every reason why demographics affects company pensions. In a company scheme you are effectively by capital during your working life, and then when retired, you are selling or renting that capital to those working, to provide your income whilst you are not working.

As the number of people in work falls due to demographics, and the number of retired people renting or selling their capital rises, the value of that capital and the rent that it can command, falls.

You only need to look at the FTSE100. In 1999, its value was 6700. Despite ten years of inflation, it is still well down on that level, despite productivity gains. This trend will go on in real terms whilst demographics are as they are.

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It's common practice for judges to use the term Justice in front of their name, it's not their first name. I'm surprised you never read that before.

As for the decision, this seems a very fair decision to me, sound businesses have nothing to fear, while it's only right that pension funds should come first in case of a bakrupcy.

IMHO pension funds should always be FULLY FUNDED anyway, with the funds held in separate accounts from the business.

Wise_eagle,

Pension funds are held in separate accounts to that of the business.

As for being fully funded all the time, well it is never that simple. The BT scheme was looked at, and it was found to have a big hole due to changing life expectancy. To fill that hole immediately would have bankrupted BT. Ironically that would have caused many other funds to develop holes, as BT stock is in many pension funds.

They are trying to close the gap over several years, with BT pouring more money in. Ironically, that money is being taken away from pensioners who own the BT stock via non-BT schemes.

Oh what a wonderful web it is, with no one to take a loss.

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As the number of people in work falls due to demographics,

Why would the number of staff of a successful business fall? Don't confuse general demographics (which affect state pension) with company pensions.

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I don't think there should be any funded pensions anyway - from a monetary perspective. Their assets are bleeding yield out of us and driving asset prices higher making property and pensions increasingly unaffordable.

Companies should not provide pensions - it simply is not their job, creates unnecessary risks and is subject to 'fraud'.

The Government should just offer a decent flat rate State pension to everyone out of current revenues.

Then expand the ISA to allow people to set aside more if they want to - but provide them with ongoing access to it should they need.

Agreed, I was just argueing within the terms of the current situation.

Pension funds only make the banksters who manage them (and the other banksters who borrow the stocks from the funds to short them) richer at our cost.

Edited by wise_eagle

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Why would the number of staff of a successful business fall? Don't confuse general demographics (which affect state pension) with company pensions.

I was talking about the economy as a whole.

If there are less people in a nation, then other things being equal, employment will fall equally amongst all businesses and sectors.

And I certainly did not confuse company and state pensions. With fewer workers, the average return on the assets invested in a company scheme, will fall. And with fewer tax payers to pay pensions, the state pension will fall too, unless you tax those workers at an ever increasing rate.

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Agreed, I was just argueing within the terms of the current situation.

I agree with you and hotairmail on this. I think that all defined benefit pension schemes should be wound down in some way, and the assets distributed pro-rata to all scheme members, who should then invest that money as they see fit.

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So the worst culprits for taking money from these funds are the oldest pensioners.

If only it was just the oldest!

My Dad retired at 60, having paid in 5%pa for a maximum of 35 years. I've no idea how much his private sector employer chipped in, but it will not have been more than 10%.

He's already had two-thirds final salary for ten years, and the first five of those were index-linked (apparently his scheme stops that when the state pension kicks in). He's not even reached average life expectancy, and I reckon he's already had more out than he's contributed.

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I was talking about the economy as a whole.

If there are less people in a nation, then other things being equal, employment will fall equally amongst all businesses and sectors.

And I certainly did not confuse company and state pensions. With fewer workers, the average return on the assets invested in a company scheme, will fall. And with fewer tax payers to pay pensions, the state pension will fall too, unless you tax those workers at an ever increasing rate.

World population is growing, your argument doesn't make any sense since companies aren't limited to a single country.

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World population is growing, your argument doesn't make any sense since companies aren't limited to a single country.

Yes, I was thinking about the workforce of the world as a whole when I typed, it makes the situation more confusing.

With the Chinese and Indian labour force coming on line, and the world market getting bigger, we have seen the price of labour fall. Those who invested in China and India or in resource stocks which these countries consume, have done well.

In the UK though, most investments have been in government bonds and companies that supply the UK consumer. They havent done so well, hence the poor returns experienced by UK pension funds.

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If only it was just the oldest!

My Dad retired at 60, having paid in 5%pa for a maximum of 35 years. I've no idea how much his private sector employer chipped in, but it will not have been more than 10%.

He's already had two-thirds final salary for ten years, and the first five of those were index-linked (apparently his scheme stops that when the state pension kicks in). He's not even reached average life expectancy, and I reckon he's already had more out than he's contributed.

mitchbux,

yes. The oldest take the most though. I know of one 99 year old chap who has been drawing out 2/3 salary pension for longer than he was working. Someone else has to pay for it.

When these schemes go belly up, those still working when the company folds, can lose literally every penny of their contributions. We have the PPF now to provide some sort of safety net. But that in turn is paid for by a levy on all other solvent defined benefit pension schemes, which is a tax on the productive businesses that generate all our wealth. Tax businesses too much, and they will disappear and you will get no tax.

The irony of all of this, is that the real winners in the pensions casino, are those who are already retired. They are the ones with the cash, but no one ever points this out, except me.

Oh, and it isnt your Dad's fault, I doubt he made the rules up. The rules need to be changed though, because these obligations are getting bigger and more unpayable, and everyone thinks that they are going to get a mighty pot in retirement. They wont do of course, but I think that people should receive a fair amount each, rather than an all or nothing spin on the roulette wheel as we have now. I also think that we should unpick the added burdens that we are building on the backs of the businesses that generate so much of our wealth.

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mitchbux,

yes. The oldest take the most though. I know of one 99 year old chap who has been drawing out 2/3 salary pension for longer than he was working. Someone else has to pay for it.

When these schemes go belly up, those still working when the company folds, can lose literally every penny of their contributions. We have the PPF now to provide some sort of safety net. But that in turn is paid for by a levy on all other solvent defined benefit pension schemes, which is a tax on the productive businesses that generate all our wealth. Tax businesses too much, and they will disappear and you will get no tax.

The irony of all of this, is that the real winners in the pensions casino, are those who are already retired. They are the ones with the cash, but no one ever points this out, except me.

Oh, and it isnt your Dad's fault, I doubt he made the rules up. The rules need to be changed though, because these obligations are getting bigger and more unpayable, and everyone thinks that they are going to get a mighty pot in retirement. They wont do of course, but I think that people should receive a fair amount each, rather than an all or nothing spin on the roulette wheel as we have now. I also think that we should unpick the added burdens that we are building on the backs of the businesses that generate so much of our wealth.

I agree.

Most of OH's pension contributions are sat in a 'final salary' pot, he turns 45 next year. The CEO and a few other directors of that company inflated their salaries prior to retirement, and are probably receiving nearer to 90%. I've been urging him to take the hit, and move what he can to his current money-purchase provision, I reckon he'll lose less that way.

I know my Dad didn't make the rules, but he sees it as his 'right' to receive a greater income than he should really be entitled to. He actually has a better standard of living now than when he was working, whilst people of my generation that used to work at the same place - some of them are friends - are going to be struggling to provide themselves with basics in retirement. If they ever get that luxury.

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Telegraph:

Interesting how the Telegraph spins this as a catastrophe (for companies with significant pension liabilities) rather than good news for pensioners and savers in pension funds. I agree that the implications are potentially serious for the viability of companies with large pension deficits (given that banks will now be more reluctant to lend to them), but the savers in those schemes are going to have to be supported in old age one way or the other, and anything that closes off the possibility of offloading that entire bill onto taxpayers has to be a good thing.

This one guarantee to go all the way to house of Lords.

If the ruling is held, expect businesses funding to go up by a few %. The administrator sharks isn't really an issue, pension trustees can hire their own administrator to sort out the books.

And oh.. this will accelerate the shutting down of any final salary schemes that is still out there.

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I don't think there should be any funded pensions anyway - from a monetary perspective. Their assets are bleeding yield out of us and driving asset prices higher making property and pensions increasingly unaffordable.

Companies should not provide pensions - it simply is not their job, creates unnecessary risks and is subject to 'fraud'.

The Government should just offer a decent flat rate State pension to everyone out of current revenues.

Then expand the ISA to allow people to set aside more if they want to - but provide them with ongoing access to it should they need.

I think it needs to be a little more controlled than that. Savings in ISA-type vehicles should be encouraged, by tax-free status, plus a guaranteed interest rate that is highly attractive (none of this 3% this year and 0.3% next unless you move it). A good way would be to pay a bonus for each non-withdrawal year, plus another bonus if the fund is kept until pensionable age (65?). Your last point is an absolute must, the fund should be available at ALL times if the saver requires it.

It's not good enough for the average person to be encouraged to gamble in the stock market for their pension, and neither do I think much good will come of NEST. Crap pension provisions are one of the things that has driven housing out of reach, it's been the only wealth preserver in town.

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Yet another daft decision by a confused person earning far too much money for anyone's good.

Does this judge have no consideration on the impact on other businesses? Businesses need credit to work, and an operating business is something that creates wealth and makes us all a little bit richer. Now thanks to the wonder of defined benefit pension schemes, we not only have cases where the business has to feed something that is unproductive (you may not like to admit it, but pensions are a cost with no benefit to those paying them) to make good on any deficit, which make the business less credit worthy, but now we have a rule that puts the pension scheme at the top of the creditors pile should a business go bust.

Well if I were forwarding credit to a business, I wouldnt do it to one with a defined benefit pension scheme unless I was certain that the scheme wasnt in deficit, or the business was so strong that I wouldnt need to worry about a bankruptcy event. If I wasnt sure about this, I would be sure of losing my money. There are though, many businesses with these schemes that are in deficit, and the businesses are financially weak particularly when the burden of the pension scheme is added in. These businesses though, are productive and are good for the economy.

Now however, they are going to find credit more scarce and more expensive. Some most likely, will fold, not due to the underlying profitability of the business, but due to ballooning pension liabilities and daft new laws made up by judges that place burdens on these businesses that mean that they can no longer compete.

Eventually expect these businesses to be replaced by ones that do not offer such good pension schemes, and expect too a greater burden on the taxpayer. The goose that lays the golden egg for these pension schemes will be strangled by the pension trustees and their wonderous new law, causing them in turn to seek compensation for their own mis-guided actions from the only pocket big enough to pay, the taxpayer.

I have no issue with the last scenario you paint. I'd have been happy if the natural free market order of things had been allowed in the first place. Why should vested interests, such as senior company managers and directors, CEOs and shareholders get preferential treatment by being allowed to dump obligations made in the past? If the firm eventually goes bust, and is replaced by a new firm then that is fine by me.

Of course the same should also have happened to the banks.

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Interesting how the Telegraph spins this as a catastrophe (for companies with significant pension liabilities) rather than good news for pensioners and savers in pension funds. I agree that the implications are potentially serious for the viability of companies with large pension deficits (given that banks will now be more reluctant to lend to them), but the savers in those schemes are going to have to be supported in old age one way or the other, and anything that closes off the possibility of offloading that entire bill onto taxpayers has to be a good thing.

I expect it is catastrophic for businesses expecting to get their bills paid. Could lead to more cascading bankruptcies, when a bigger company goes bust owing money to the little guys. I expect there'll be a big outcry sometime when a group with a powerful media voice (e.g. farmers) go unpaid.

I expect it'll make for a radical shakeup of credit ratings!

Having said that, it's a whole lot less perverse than the Equitable judgment, that totally robs its victims with no possible comeback. Suppliers can in theory withdraw credit, and where that's not possible they can insure. Unless of course they can't get business at all without credit[1], and insurance puts costs up to where they can't compete in the market.

[1] Think of the deal most of us have - to get paid monthly in arrears for our work. Just try to get employment without extending that month's credit to your employer, then consider what it's like for a smaller supplier whose costs and potential losses extend well beyond just a few weeks unpaid work.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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