Eighty billion poison pill for Llyods in HBOS accounts.
This blog stated from the start that HBOS would destroy Lloyds, it repeated the warnings throughout the long run-up to the final take-over just one month ago and noted concern at Legal and General in particular having supported the merger on 20th October last year, here, and again on 22nd November, linked here.
The report that the books of HBOS contain debts of 80 billion pounds Lloyds considers unacceptable is from The Independent this morning, linked here. It hardly comes as a surprise and if anything probably still understate the situation as things continue to deteriorate at a far faster pace than Lloyds even now anticipates - witness the US fourth quarter GDP shrinkage adjusted yesterday from minus 3.8 per cent to minus 6.2 per cent.
The UK media continues to be distracted by one individual's excessive pension while one opposition party leader remains in mourning having neglected his political duties for years and another even more pathetically continues on paternity leave! It is generally accepted that the nation's Prime Minister and Chancellor of the Exchequer are drowning, apparently (as illustrated above from the Anglo Saxon Chronicles blog) while atop the shoulders of English taxpayers.Labels: The Crash
posted by Martin at 9:06 AM
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Government admits taking advice on cutting public sector pensions
The Treasury has admitted taking legal advice about "defaulting on public sector pensions", while a leading pensions expert predicts that private-sector companies will be "bankrupted by their pension deficits" this year.
By Ian Cowie
Last Updated: 8:20AM GMT 27 Feb 2009
John Ralfe, the consultant who switched Boots' pension fund out of shares while the FTSE 100 stood more than 50pc higher than it does today, used the Freedom of Information (FOI) Act to prise an admission out of the Treasury that millions of people on the public payroll may find disturbing.
After estimates that final-salary or defined-benefit pensions already promised to public sector workers may cost taxpayers more than £750bn to deliver, Mr Ralfe asked the Treasury if it had considered cutting these entitlements. Last week, a Treasury official wrote back to say: "I am writing to confirm that we hold relevant information, in relation to your request for 'any papers showing whether the Government has taken advice or has a view on the legality under European law of, effectively, defaulting on public sector pensions'.
"We have now completed our consideration of where the public interest lies in relation to this information and have concluded that, in this case, the public interest lies in maintaining the FOI exemption. Without the ability to obtain full and frank legal advice the quality of the Government's decision-making would be much reduced and this would be contrary to the public interest."
Mr Ralfe told The Daily Telegraph: "I cannot believe the Government would renege on public sector pensions by cutting them, but they have, it appears, asked the question whether they could do so under European law. My view is they could not, as it is part of a contractual arrangement, which the European courts would uphold.
"The Treasury continues to be in denial about the cost of new public sector pension promises and the implications for the total already promised."
Falling stock markets, rising longevity and higher taxes have put many pension funds under strain – particularly those that cannot be sure taxpayers will pick up the bill. When trustees of the Royal Mail pension scheme told 450,000 members this week that liabilities exceed assets by more than £5.9bn, people in other occupational and company funds may have wondered how safe their retirement savings are.
Ros Altmann, a governor of the London School of Economics, played a leading role in gaining compensation last year for 160,000 workers who lost their savings when company schemes went bust, but she was pessimistic about the outlook this week. "This year will see the reality of companies being bankrupted by their pension schemes – that is effectively what has happened to Royal Mail already. Royal Mail is a quasi-government-owned company, so it is highly unlikely that the pension scheme would actually end up in the Pension Protection Fund (PPF), which is there to insure members' pensions if a private-sector-sponsoring employer goes bust.
"The letter from the trustees is basically saying that the deficit in the Royal Mail pension scheme has grown significantly. This is a position that companies up and down the country will be facing. After the last couple of years, the value of pension schemes's assets has plunged and the value of their liabilities increased, leaving a bigger hole in funding.
"Despite companies having paid in huge sums to try to get rid of their deficits, the deficits have worsened. Now that all firms are struggling with the economic downturn, they are simply not going to be able to afford to pay in huge extra sums to the pension, while also keeping their businesses going."
The PPF is a statutory safety net, intended to protect pension savers against company failure. It is funded by levies on those companies that have a defined-benefit or final-salary scheme. This includes Royal MaiI, which pays into the scheme unlike other public sector organisations. If a company goes bust, taking its final-salary scheme with it, the PPF says it can pay out your entire pension every year, as long as you have already retired.
If you have had to retire early on grounds of ill health or you are a widow or widower, receiving a pension in relation to someone who has died, the PPF will usually pay 100pc of the pension you should have received at the time your employer went bust. These payments are not subject to any maximum value. However, if you are still working and have not reached retirement age or have retired early – perhaps due to ill health – the PPF will only pay you up to 90pc of what your entitlement would have been. This level of compensation is subject to an overall maximum value that is currently set at £27,770 a year for people aged 65.
Ms Altmann said: "This means that people who have very large entitlements and are concerned about ending up in the PPF should look seriously at taking a transfer value out of their pension scheme. They should go to an independent financial adviser and check their position carefully.
"It might also be worth getting financial advice even if you are a pensioner and looking to take a transfer value out of the scheme and buying an annuity directly instead. This is especially worthwhile if you are in poor health and could get an impaired life annuity."
Kevin Cuevorst, of independent financial advisers Origen, said: "Company pension members should read the 'funding statement' in their scheme trustees' annual report, which gives an indication of its asset values in relation to its liabilities to pay pensions.
"If the scheme is underfunded, then the trustees have to have a plan in place to put the situation right – although they do not have to disclose that to scheme members.
"The next step is for individual employees to take a view on how their employer is trading and whether it is sound enough to make good any deficit out of future trading. For example, you might be most concerned about a company which is going through a rocky period and has a huge deficit."
There are four ways the extent by which liabilities exceed assets can be measured – and they may produce very different pictures. First, the full buy-out funding position, also called solvency position or ''winding up'' deficit, is the figure quoted by the Royal Mail trustees and relates to the amount of money the scheme would need if it went to an insurance company and bought annuities to cover the full pension payments in future. This is the most expensive measure of deficits because an insurer will charge a profit margin to take on the liabilities.
Second, the "ongoing" funding position is the measure usually used by trustees to show how much money the scheme will need to pay all its liabilities going forward, assuming that the assets of the scheme earn some cautious rate of return.
Third, the statutory Section 179 – or PPF buy-out – basis. This is the measure used by the PPF to value pension deficits and relates to the cost of fully buying out the pension liabilities only up to the PPF payment level.
Fourth, the accounting valuation – also called IAS19 or FRS17 – is the measure of scheme funding used in company accounts. It usually gives the lowest liability value, so it will paint the funding position in the most positive light. That is why some experts say members cannot rely on company accounts to check the value of their scheme deficit and should instead ask trustees.
Ms Altmann emphasised it was unlikely that the Royal Mail scheme would end up in the PPF: "Far more likely is that the Government itself would take the scheme over – and I believe that is what the Treasury may well actually want to do. They would be very keen to take in the billions of pounds of assets held by the Royal Mail pension scheme. This would give the Treasury a huge cash flow boost today and then it will be up to another government to find the further funds to keep paying pensions in coming decades."
The Daily Telegraph guide to how to turn pension savings into retirement income, in association with Origen, provides a simple overview of the options available to you when approaching retirement. It also includes a Q and A section for those frequently asked questions. FREE copies of the guide, written by Ian Cowie, can be obtained by calling 0870 1267 540 or online at telegraph.co.uk/readerguides
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