Pensions are complicated, someone said. Unless you are the chief executive, in which case they are beguilingly simple — items of beauty that could win design awards.
If the company you lead says it will pay you £200,000 a year towards a pension, it gives you £200,000 a year. That’s it. Completely straightforward.
If you’re one of the workers, that’s when it gets terribly intricate.
If you work for 25 years on a salary that ends up at the riches that are £20,000, the company says that you can retire on a salary of £20,000 a year. Unless it completely fouls up the maths, doesn’t pay enough in — or has a failing business in the first place.
In which case, money you thought was wages deferred — cash you were owed — suddenly becomes an impossible dream from which you must awake and smell the coffee.
So it is at Royal Mail, where 90,000 members of a “defined benefit” pension scheme have been told that their retirements are unaffordable — unless they all agree to die a lot sooner — and that the risk of paying pensions in future must transfer from the company to the individual.
The cost to our postman of this shake-up is likely to be something like £100,000 over the course of his retirement (unless he agrees to die a lot sooner, in which case it will cost him less because he will be dead).
Of course, if someone nabbed £100k from Royal Mail chief executive Moya Greene she’d be rightly outraged. She would sue and she’d win.
Hilariously — not that it gets why it is funny — Royal Mail is at pains to point out that Greene’s pension contribution is simply part of her salary. That is, it is something non-negotiable that can’t be taken away.
If they got that this goes for more than one employee, it would be progress.
Royal Mail would say that if it honours its pensions, it isn’t profitable. In which case, it isn’t profitable. Those declared profits are an illusion in the first place.
That the shares come with a dividend payment attached is somewhere between funny and insulting (staff do own a decent chunk of the shares, in fairness, but that’s no replacement for a wage in retirement).
For the pensions to be paid, Royal Mail does need a future, but its predictive powers don’t offer much by way of hope.
The pension promises it intends to break were made, in some cases, decades ago. A company that can’t even predict things that have already happened might struggle against Amazon and co.
Some observers have described the pensions of the Royal Mail workers as a “social contract” that should be kept. They are more than that — they are actual contracts, certainly in the minds of the staff. Unions have come up with a decent compromise to the row. Members will take a lower benefit but it would still be a defined amount, not dependent on how the stock or bond market happened to do in the year the member retired.
The alternative to that looks like a mass strike, which would completely disrupt Royal Mail’s business plans and see even more trade leak away.
Those are the cards Royal Mail management has to play with. It would be reckless folly for this issue to end up in destructive industrial action. The company should take the union’s offer, and thank it for getting them out of a dreadful pickle.
Politics of being a fund manager
Chatting to Andrew Formica, the amiable Aussie who runs Henderson Group, is an interesting experience. The answer he gave to my every question was about politics rather than markets or economies. Ten years on from the financial crisis, it is still government policy and public voting that drives business. A situation that doesn’t seem likely to shift much any time soon. For stock pickers such as Henderson, that presents a particular problem. There’s not much point in a fund manager doing a brilliant piece of analysis which proves that company X has a strong competitive advantage over company Y and much better management. Because external events are going to have a much bigger effect on how shares in that industry perform in any case. The things Henderson cannot predict are going to prove much more significant than the things it, sometimes, can. Formica thinks a low-interest rate, low-return environment is when active fund managers really show their worth. Maybe. Or maybe that’s when they get cruelly exposed for the fact that their static fees erode nearly all performance gains. Tough gig, being a fund manager, just now.