‘Bureaucracy Trumps Common Sense’ in UK Government Pension Proposals

(January 20, 2012) — Legislative changes to how companies in the United Kingdom calculate member benefits are unnecessary and will hit plans already struggling with poor funding levels and low investment returns, experts have warned.

A consultation document published by the Department of Work and Pensions on Friday, set out changes to the current working system that would bring legislation on gender equality in pension payments in line with European Union legal standard.

The proposed legislation would see employers offering defined benefit pensions bring the Guaranteed Minimum Pension (GMP) benefit entitlement for men and women in line, following a legal case settled in 1990.

The DWP consultation document set out the reason for the proposed changes: “Most scheme members accrue benefits in excess of the GMP minimum. However, the different GMP payment ages for men and women can still result in a difference of treatment. Moreover, the rates at which the GMP accrues to men and women can have an effect on the overall amount paid, where the scheme applies different rates of revaluation and/or indexation on that part underpinned by the GMP and the balance.”

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Industry participants and affected companies have been asked to respond to the consultation by April. A spokeswoman for the DWP said the government was just offering clarity to employers with these schemes, so they could better adhere to the legislation already established through case law on a European level.

Pension experts have reacted angrily to the announcement, however.

John Ball, Head of UK Pensions at Towers Watson, said: “When employers agreed to finance replacements for state benefits in return for contracted-out rebates, the payments they received reflected the unequal nature of state benefits. Effectively, employers are now being told to fund more valuable benefits than the Government paid them to provide – obviously not something that companies will welcome.”

Ball added: “By changing UK law, the Government is imposing this on employers regardless of how the courts would have interpreted European law. The DWP has suggested a method of equalising benefits that is very much at the expensive end of the spectrum, both in terms of extra payments to members and in terms of administrative costs. Schemes following this approach would have to give each member the better of male benefits and female benefits not only overall but also in each year of retirement. “

Paul McGlone, Principal Consultant at Aon Hewitt, said: “GMP equalisation looks set to be another headache for UK pension schemes in a year that they are already facing challenges from low gilt yields, high deficits and auto-enrolment. The main cause of the headache is European legislation around equal treatment, which now dates back over 20 years.”
Giannis Waymouth, Pensions Lawyer at Allen & Overy, said: “The government is in a small minority of those who believe EU law requires the GMP to be adjusted. However this proposal attempts to kill that debate – no matter what EU law requires – GMP equalisation will become compulsory in the UK. Why couldn’t they let sleeping dogs lie as industry bodies urged them to? “

The proposal also covers the actions of the Pension Protection Fund, the lifeboat for bankrupt company schemes, but a spokesman for the fund said it had established a way to tackle the issue in November and did not foresee any changes that would have to be made as a result of this latest move.

McGlone concluded: “Attempts to ask the DWP and others to ‘leave well alone’ have not fallen on deaf ears, but they do not seem to be able to stand up to the demands of European legislation. Even though the implementation of GMP Equalisations is fraught with difficulties that will outweigh the benefits, it looks like this is an area where bureaucracy will trump common sense.”

"Some people say that Eastman Kodak's pension plan is in danger because the company filed for bankruptcy, but it's really too early to tell," says PBGC spokesman Marc Hopkins.

(January 20, 2012) — The Pension Benefit Guaranty Corporation (PBGC) — the federal agency, which assumes the pension liabilities of companies in bankruptcy — has asserted that concerns over the future of Eastman Kodak’s pension scheme following the firm’s bankruptcy is premature, due to the scheme’s reasonable funding level.

“Some people say that Eastman Kodak’s pension plan is in danger because the company filed for bankruptcy, but it’s really too early to tell,” PBGC spokesman Marc Hopkins told aiCIO, referring specially to the Rochester, NY-based firm’s US scheme. “If the result of the bankruptcy process is that Kodak cannot afford their pension plan, we would step in and take on pension liabilities, paying benefits up to the guarenteed limit,” Hopkins said, noting that the action is only hypothetical, as the PBGC’s action would evolve over the course of the bankruptcy, which could take at least 18 months.

Hopkins referenced Visteon Corporation, a global supplier of climate, electronics, lighting and interior products, which went through bankruptcy, reorganized, and kept its plan intact — emerging from bankruptcy on October 1 of 2010 with an improved balance sheet.

PBGC issued a statement saying: “Kodak’s US pension plans are reasonably well funded and we want to make sure they stay that way. We will actively participate in Kodak’s bankruptcy to protect Kodak’s pension plans for their workers and retirees.” According to the PBGC, Kodak sponsors two traditional pension plans that cover nearly 63,000 people. The plans are 86% funded, with about $4.9 billion in assets to cover about $5.6 billion in benefits.

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Kodak filed for bankruptcy protection early Thursday morning, aiming to streamline and improve its business. In a video with WXXI Public Television, Antonio M. Perez, the company’s chief executive, said: “We’re taking this step at this point in our transformation in order to build the strongest possible foundation for the Kodak of the future.”

Some sources conclude the Chapter 11 filing came as a call for help before the firm ran completely out of cash, as the company already owes a growing amount to creditors.

In 2011, PBGC worked with 19 companies in bankruptcy to continue their pension plans after the sponsor reorganized, or after a new owner assumed operations. Their pension plans cover about 74,000 people, who will receive their full promised benefits. This kept more than $2 billion in obligations off the agency’s books. Perhaps not surprisingly, the fund has been pummeled in recent years by the economic downturn which has caused more corporate bankrupts and pension failures.

While Hopkins said it’s too early to assess the impacts of Kodak’s bankruptcy on its pension, the Chapter 11 filing may be a further indication of the increased pressure the PBGC faces as more corporate bankruptcies and pension failures contribute to its widening deficit.

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