Final salary schemes - privatised companies

[Welshbeef]

Have a question.

We all know that all nationalised "companies" do not have any pension funds they are all pay as you go.

So how come BT/BA/Br steel etc all have final salary pension funds today and also from the day they were privatised ?
Did the govt suddenly pay x amount into a fund at sell of time? Was the scheme totally balanced at that point? How my h cash did the govt actually earn from these sell offs if most of the cash simply went into creating the pension funds?

[ralphrj]

As the companies were privatised during the 1980s when investment returns were higher and life expectancy was lower they probably didn't have deficits at the time they were sold.

[Welshbeef]

ralphrj said:

As the companies were privatised during the 1980s when investment returns were higher and life expectancy was lower they probably didn't have deficits at the time they were sold.

The govt never held any pension funds. They were totally unfunded - instead they used a pay as you go system just like the teachers and council workers. Ie the current workers pay which pays for the current pensioners.

The arguement for using PAYG instead of creating a fund is that the govt believe that spending what would have gone into a fund on other investments infrastructure etc that will generate a much higher future tax take therefore that's the better choice.

So today you hear about £2-5 trillion of off balancesheet govt debt. That is partly PFI and then the vast majority is teacher and other civil servants pension funds ( or lack of a fund).

[ralphrj]

Welshbeef said:

The govt never held any pension funds. They were totally unfunded - instead they used a pay as you go system just like the teachers and council workers. Ie the current workers pay which pays for the current pensioners.

The arguement for using PAYG instead of creating a fund is that the govt believe that spending what would have gone into a fund on other investments infrastructure etc that will generate a much higher future tax take therefore that's the better choice.

So today you hear about £2-5 trillion of off balancesheet govt debt. That is partly PFI and then the vast majority is teacher and other civil servants pension funds ( or lack of a fund).

I didn't realise that there was no fund at privatisation.

Googling shows that, in the example of BT, the Government gave a Crown Guarantee that they would honour the pension entitlements of BT workers. This means that if the BT pension scheme were to fold then the Government would have to foot the bill. The bill for BT would be £22.8bn. This does not mean that the taxpayer will actually get a bill for £22.8bn as the scheme is not insolvent and any shortfalls can be made up by a combination of increased employer and employee contributions. In reality the only way the pension scheme would fold is if BT were to go bust.

[Welshbeef]

But I don't get that at all.

Why would any individual accept that? Basically day 1 of privatisation there is £0 fund and they are working to behind with on a PAYG and then the company has to make up the defecit over time. Clearly that makes it very expensive as there would be some people with 40years service but zero fund.

Then as clearly what always would happen with privatisation headcount decreases so naturally the "fund" would become in defecit.

I've no idea why the unions accepted this as any foresight was very clearly who would be paying for it... Customers company and the employees!! Seems a poor deal.

[greygoose]

Welshbeef said:

I've no idea why the unions accepted this as any foresight was very clearly who would be paying for it... Customers company and the employees!! Seems a poor deal.

But with a government guarantee to pay the risk isn't that high (perhaps more now but not at the time of privatisation).

[Welshbeef]

greygoose said:

But with a government guarantee to pay the risk isn't that high (perhaps more now but not at the time of privatisation).

But on day 1 fund value was nothing and it operated as a PAYG scheme. So under Accounting rules it is instantly in huge defecit. Possibly the defecit would be larger than the Market cap as such the pension fund could have just taken over all shares in existence and then still require the Govt to cough up the difference.

[greygoose]

Welshbeef said:

greygoose said:

But with a government guarantee to pay the risk isn't that high (perhaps more now but not at the time of privatisation).

But on day 1 fund value was nothing and it operated as a PAYG scheme. So under Accounting rules it is instantly in huge defecit. Possibly the defecit would be larger than the Market cap as such the pension fund could have just taken over all shares in existence and then still require the Govt to cough up the difference.

Was the pension fund value at zero on day 1 though, I can't find any figures for that long ago (probably because the internet wasn't around then)?

[Welshbeef]

greygoose said:

Was the pension fund value at zero on day 1 though, I can't find any figures for that long ago (probably because the internet wasn't around then)?

That's the key question. But if the Govt did pay out any cash they would instantly have taken on more debt or the cash income from the privatisation would have been used to set them up. In which case selling them off wasn't that great a deal net neutral or marginally ahead - due to zero fund.

I think it's an interesting question as privatising other areas of the council etc or schools etc could be an option so what happens to pension schemes?

I believe one option is on the day of privitasiation you have a valuation and that's fixed and paid to you by the govt then from day+1 you have a new scheme paid into by a fund and the new privatised company to the same deal as you had previously. Clearly a problem in doing this is it crystallises the govts liability plus of course anyone already retired wouldn't be transferred so the govt would have to pay them out.