Danger UXB

Written by Gerry Mulvaney | 10 August 2011

Recent high profile casualties in the printing industry have highlighted the existence of a bomb planted many years ago in the halcyon era of final salary pension scheme. It’s activated when the company is unwilling or unable to continue payments to their scheme and finally explodes when the company comes under pressure from lenders or creditors and discovers that the pension fund trustees have more control over the destiny of the business than the board of Directors.

The decline of the final salary scheme has been much documented and today they are rare. Everyone will now have to make provision for retirement and there are a number of government sponsored schemes out there that endeavour to ensure the aging population will not have to live off state handouts.

However, nothing has really been done to deal with the legacy of the deficits which sit like a millstone around the necks of their owners. They have built up over the years as a result of underfunding, government taxation policies and the longevity of the beneficiaries. Actuaries have made a lot of money recalculating every three years the ever changing size of the deficit, and encouraged by government demanding that companies pay more hard earned profits into their schemes, even after they have been closed to new members and existing members benefits have long since stopped accruing. In many cases, the pension fund liabilities, which now have to be revealed in all their gory detail in the annual accounts, have a higher value than the net worth of the business.

The pension fund is controlled by Trustees, who rightly have to place their own member’s interests above that of the company. They need to ensure that contributions to reduce the deficit are on-going even if profits are not there to support them. They know they will be high on the list of preferential creditors and in any event if the company is no longer in existence, the government’s Pension Protection fund will step in and provide benefits to their members. The pressure on the Trustees to support the company is therefore minimal.

So where does this leave the hard pressed Directors, with a company final salary pension scheme, when in difficult trading times they seek to sell, merge or refinance their business? Between and rock and a hard place usually, because the Trustees of the pension fund will have the veto on any solution that damages their members interests and potential purchasers or lenders are highly unlikely to want the responsibility of the unquantifiable pension deficit liability. The end result is usually administration, where the pension fund liabilities, along with the rest of the company’s debts, are left behind for the administrators to deal with.

The graphic arts industry is littered with examples of companies brought down by their final salary pension fund liabilities. There is no clever answer to the problem, but spare a thought the next time it happens for the impossible position that the Directors find themselves in.

Gerry Mulvaney
gerry@graphicdisplayworld.com