Thorn in my side
10 June 2002
5 December 2005
7 May 2001
9 March 1996
16 April 1997
13 February 1996
The Occupational Pensions Regulatory Authority (Opra) recently ruled in a preliminary hearing that the £100m Thorn occupational pension scheme surplus be shared between the employer (now owned by Japanese heavyweight Nomura) and the scheme's 30,000 pensioners.
Much of the information bandied about after this hearing has been inaccurate. In 1996, Thorn EMI went through a demerger and became two separate companies - Thorn Ltd and EMI Group Limited. Having split from the record company that gave us The Beatles, Thorn's shares went into decline and Nomura bought the company for £980m. It is, however, at this point that we say goodbye to EMI, contrary to some reports that Opra's hearing focused solely on the Thorn pension scheme's surplus.
Much has been made of the notion that Nomura has come crashing into town like a financial Godzilla to pillage a pension fund that it never contributed to. It sounds outrageous - how can it buy a company and steal its pensioners' cash from under their noses? It is true to say that Nomura never paid a penny into the scheme. Is it not, therefore, somewhat distasteful that this megalith should demand half of the fund from a group of pensioners receiving, or likely to receive, modest pensions? On the face of it, yes. However, the reality is less straightforward.
This is an interesting case in that it is only the second of its kind. The first was mentioned in Opra's 2000/2001 annual report, but the details were confidential.
Under Section 69(1) of the 1995 Pensions Act, Opra has the power to authorise a modification of a pension scheme to enable the reduction of a surplus. Inland Revenue rules limit a scheme's surplus due to the tax advantages involved.
The Thorn Pension Scheme rules do not allow a return of the surplus to be paid to the employer. At the same time, benefit improvements can only be granted by the employer. In order to avoid a possible impasse, the trustees of the scheme negotiated a benefit improvement in exchange for a return of part of the surplus to the employer. To enable this exchange a modification order is required.
The benefit improvements tabled are an immediate increase in pensions of 5 per cent and an increase to the Limited Price Indexation (LPI, or the percentage by which pensions are increased) from a minimum of 5 per cent to a maximum of 7 per cent per annum.
Although the latter may not appear particularly attractive in the present climate of low inflation (and hence low pension increases), the history of inflation since World War II suggests that we should not become complacent. If inflation was running at 7 per cent and a pension was increased by only 5 per cent, then it would quickly devalue.
Before issuing authority for this, Opra must be satisfied that the trustees' decision has been made for the right reasons. Opra examines whether the modification is in the interests of the members and that all relevant information has been taken into account.
It is worth pointing out that not all of the pensioners think they are being disadvantaged by Nomura's offer. Only 50 out of 30,000 are appealing against the decision to grant the modification order.
The 50 Thorn pensioners argue that, because Nomura has never paid contributions into the scheme, it does not deserve to share in its surplus. Furthermore, they allege that Nomura has massaged the fund by altering the investment portfolio to artificially increase the surplus. Their biggest fear, however, is for their future security, which they think may be in doubt if the proposal is accepted.
The pensioners are concerned that Nomura is getting something for nothing; that it has purchased a company with an overfunded pension scheme that it is now seeking to plunder.
Financially, a pension scheme is not necessarily an asset - it can just as easily become a liability. Consider the amount of employers desperately trying to close final salary schemes to new employees. Who is to say that, in a few years, the investment returns will not plummet drastically, leaving a shortfall to be made up? Would the pensioners lay claim to that deficit and insist on taking a cut in their pensions to make up for it? Of course not. The employee bears no investment risk in a final salary (or defined benefit) scheme. This is one of the features, compared with money purchase (or defined contribution) schemes, that makes final salary schemes so attractive.
Final salary pension schemes involve a certain amount of give and take. Members pay a contribution towards the cost of providing a pension for life, a tax-free lump sum and dependent's benefits, while the employer pays the not inconsiderable balance of this cost.
Some pension scheme members seem to be under the illusion that their contributions entitle them to a stake in the fund. They do not. And nor should they, as it would undermine the provision of pension scheme benefits.
Regardless of its validity, some people will see the Thorn pensioners' campaign as a worthy and justified one. Certainly, Hammond Suddards Edge, Robert Ham QC of Wilberforce Chambers and Philip Engleman QC of Cloisters do. They have so far represented the pensioners on a pro bono basis.
Some financial columnists may herald the outcome of this case as another nail in the coffin of the final salary scheme, or suggest a victory for Goliath over David. However, looking deeper into the matter, it is clear that Opra has made sure that the employer has had to jump through all of the relevant regulatory hoops.
Opra is clearly reassured that, so far, the employer has just reason for its actions in requesting a modification order to return part of the surplus. Remember that Opra must be satisfied that the trustees have acted in the interests of the scheme members.
The strict and transparent system of regulation now in place simply did not exist in the pensions industry prior to the implementation of the Pensions Act. We should feel encouraged by the fact that, where there is a perceived threat to pension funds, Opra is ready and able to ensure that nobody is having the wool pulled over their eyes.
Andy Blake is the principal pensions officer at the British Medical Association
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