Christopher Fildes

A hedge fund on your balance sheet, a cuckoo in your nest

A hedge fund on your balance sheet, a cuckoo in your nest

Text settings

A Scottish accountant has his own way of injecting the fear of God into his hearers. This must be one reason why Douglas Flint is finance director of HSBC, and made him the natural choice when his fellow accountants at Cima wanted someone to lecture on pensions. On the day, he came right up to proof. A company running a pension scheme, he said, might as well have a hedge fund on its balance sheet. On the backs of the necks of his City audience, hairs could be seen rising. Hedge funds, they thought: arcane, inherently risky and possibly dodgy — what were their companies doing in this sort of business? Up to a quarter of their scheme’s value, they were told, could be at risk to changes in the value of its assets and liabilities in any year — and these assets might add up to half of their company’s stock market value. So a risk to the scheme was a risk to the company. A bank like HSBC would have thousands of full-time professionals managing risk all the time. The risks in a pension scheme might be assessed twice a year by a couple of guys at the back of the human resources department. By this time Douglas Flint had achieved his effect, and his hearers had started to think they were in the wrong business.

Pensions with wings

It can happen. It has happened to British Airways, which is now revealed as a pension provider with wings. After a bumpy flight, BA is back in profit, and on the face of things earning enough to resume its old habit of paying a dividend. No chance. BA’s pension scheme, looking after all those captains who retired at 55, is £1.4 billion in deficit. That is about half BA’s stock market value, which makes Douglas Flint’s point, or one of them. New accounting rules mean that this deficit has to appear on the company’s balance sheet, where it wipes out all the reserves that could have been distributed as dividends. At that, BA is luckier than its American competitors, whose pension schemes have ruined them — though, much to its annoyance, they still keep on flying. General Motors and Ford are two American pension (or ‘welfare’) providers who started in the automotive business and wish they had never strayed out of it. At home, the Pensions Act now requires solvent schemes to bail out insolvent ones, and may entitle the regulator to a stake in a scheme’s parent company. No wonder the latest recruit to BA’s board is the chief inspector of accidents.

On top of the seesaw

All these hidden hedge funds support pensions which are linked to final salaries. Ten years ago this was everyone’s idea of what a pension scheme should be, and its greatest charm was that it seemed to be painless. Most schemes were in surplus, most companies had given themselves holidays from paying contributions to them, Robert Maxwell had thought of them as sitting targets, and a prospective Labour chancellor was working on the same idea. The truth was, as we can now see, that their balance of risk and reward was unstable. They were then at the top of the seesaw. Now their sponsors just want to get off. They are happy, or at least willing, to make contributions towards their staff’s pension plans, but that is as far as they go. It would be logical, now, for BA to approach Standard Life and ask for a non-compete agreement: pension providers would not fly aeroplanes, and vice versa. The newest director could then take it easy.

Owners’ rights

This change must horrify all those who think that pensions are too difficult for pensioners to cope with. (Adair Turner, reviewing pensions for the government, is one of them.) If pensions are not linked to salaries, they can only be linked to the amount of money in each pensioner’s pot. The risks and rewards of investment go with them. Ownership goes with them, too. No one else can dip into the pot and use the money to cross-subsidise the chairman’s pension, which is standard practice in a conventional scheme. We can normally cope with the risks and the rewards that go with ownership, and do not depend on our employers to provide our houses for us. Ownership and savings are two sides of the same coin, and what this coin buys is independence and freedom of action. That must be a better guarantee for our old age than the goodwill of some long-past employer — and far better, of course, than counting on the government’s goodwill. From a Scottish accountant, this might even pass as good news.

Junk mail

The Royal Mail — but you guessed it. This is now an overstretched pension provider with a postal business on the side. The posties’ scheme will soon be in deficit by £4.5 billion, which will make the parent company insolvent and preclude it from paying any dividends to its shareholders (us). The chairman hopes that the scheme will be bailed out by the government (us). The post arrives later than ever, but nowadays it is meant to. Adjusting the targets lets the chief executive be paid a bonus of £2 million for hitting them, or some of them. ‘The best quality of service for a decade’, so the Royal Mail tells us. No wonder that it seeks growth from junk mail.

Take Walter’s tip

George Osborne, the new shadow chancellor, has the honour to represent my birthplace in Parliament, and to follow in the outsize footsteps of Lieutenant-Colonel Sir Walter Bromley-Davenport, the member for Knutsford (now relabelled Tatton) for 25 years. He was a true blue uncomplicated Tory, and Jock Bruce-Gardyne, succeeding him, was alarmed to hear him booming down the telephone: ‘Bruce-Gardyne? Just a word of advice. You want to look out for the PSBR. Have you got that?’ Jock certainly had — the Public Sector Borrowing Requirement was a new totem of policy, dear to his monetarist heart, but he was surprised that the word had got through to the shires. ‘Now’, the booming voice continued, ‘I don’t understand it myself, but there’s a clever fellow here who knows all about it. I’ll just go and get him.... Bruce-Gardyne? Are you still there? I’m so sorry, he’s asleep.’ So Jock got no explanation, but as so often, Sir Walter’s instincts were sound. My advice to Mr Osborne, when taking on Gordon Brown and his figures, is to look out for the PSBR.