Our Regulatory Evaluation Group (REG) held another of its successful lunchtime discussions yesterday, with Paul Thornton OBE (pictured left), head of Gazelle Corporate Finance. The theme was company pension funds – a topical subject in view of the worries about the sheer scale of pension funds that are larger than the companies that sponsored them – like the Post Office pension scheme – and those which have a huge deficit to match – like that of British Airways.
A particular concern for financial managers is whether the huge deficits that have opened up – following Gordon Brown's changes to the accounting and liquidity standards, and of course the effects of falling investment returns because of the financial crisis – are actually making mergers and acquisitions impossible. Already we have seen potential bidders walk away from a deal because the pension trustees have argued that a huge wodge of finance is needed to close their deficit.
In fact, there seems to have been a certain amount of gaming going on between pension trustees and company boards. By making changes to their funding assumptions, the trustees may well be able to increase their apparent shortfall and so scupper a takeover or merger that they don't particularly like.
Nevertheless, a lot of the deficits are all too real. And to some extent that is chickens coming home to roost as companies have underfunded their pension schemes during the good times. I would argue that pension funding requirements should be stated clearly on company balance sheets, so the potential liability is clear. Come to think of it, that is exactly the way the government should run the state pension, and all those index-linked civil service pensions, too. But of course they don't. The government's pension schemes would not even pass its own laws and regulations. Indeed, if the cabinet were private-sector pension trustees, they would all have been carted off to Pentonville Jail long ago. Now there's a thought to keep you happy in an impoverished retirement.
