DIY Investor Magazine
/
September 2016
46
In a report just out from the High Pay Unit it is noted
that FTSE 100 CEOs enjoy average remuneration of
£5.5m a year, which has increased by ten per cent in
the last year. Let me explain the dismaying connection
between this state of affairs and the, by now, infamous
BHS pension fund deficit.
Back in September 2013 I highlighted the absurdly high
levels of pay many senior executives were receiving
and how this would lead to the cancer of socialism
spreading once more. Sadly this is exactly what has
happened.
Jeremy Corbyn has taken over the Labour Party and
our new prime minister has wasted no time in vowing a
corporate crackdown on the privileged few. I suppose I
should be pleased with the latter development but that
would be to miss the root cause of what has happened
and that is all to do with asset management and
structure of our pension funds.
The answer is to be found in the latest release from
the Office for National Statistics ‘Ownership of UK
quoted shares’. Go back to 1998 and you find our
pension funds holding 22% of their assets in UK quoted
equities, whereas in 2014 this fell to a microscopic three
per cent.
The next largest professional fund manager category,
insurance companies also held 22% in 1998 and
now have a paltry six per cent in our mainstream
companies. There are a number of shockingly
inevitable consequences of this but for the purpose of
this article let’s focus on two.
FTSE 100 PAY AND THE BHS PENSION FUND DEFICIT:
MUCH LESS THAN SIX DEGREES OF SEPARATION
The first is that if your fund manager has an insignificant
part of his assets tied up in our biggest companies
he/she is not going to spend any time developing a
constructive steward-like dialogue with FTSE 100 CEOs
– and of course one of the consequences of such is
that the boards of these companies can and do pay
themselves egregious amounts of money. Some 54%
of shareholders are now from the ‘Rest of the World’,
as the ONS amusingly puts it, and a further 12 per cent
is held by individuals and neither category are in a
practical position to control excess.
The other inevitable consequence, which could be
labelled the BHS effect, is highlighted in a brilliant
article by Anthony Hilton in the Evening Standard. I can
do no better than quote his succinct account of the
disaster that has become our pension fund policy: ‘Until
the 90s, the health of a pension fund was assessed by
working out the value of the current and future income
streams generated by the fund – basically the dividend
flows – over the following 25 years.
As long as this was more than what would have to be
paid out, all was well. Then some bright spark of an
accounting purist decided dividends were too volatile
to be used as a long-term measure so the only income
that could be assumed to be permanent was the ‘risk-
free’ rate on government bonds or something similar.
‘But doing the sums this way assumes pension funds
earn much less money than is actually being earned.
So it turns hitherto healthy funds into basket cases. And
as each successive fall in interest rates pushes the risk-
free rate even lower, things get worse.
Then they hit on a cure that was worse than the disease
– something called liability-driven investment.
THERES A MAY AND PHILLIP HAMMOND HAVE THE
TOOLS TO PUT AN END TO THIS SHAMBLES
By The City Grump
