BBC removes 'gold plate' from pension scheme
In response to a ballooning deficit in its pension fund, the BBC is taking an axe to the benefits provided to employees who contribute to that fund.
Now I wouldn't normally write about this. Why would you wish to share in the private grief of someone who happens to be a member of that fund?
That said, the BBC is a public-sector organisation, albeit one proud of its independence from government and not financed out of general taxation (apart from the World Service) - and what it is doing may therefore influence how the new coalition sets about reducing the costs and liabilities associated with those supposedly gold-plated final-salary pensions in the rest of the public sector.
One important difference between the BBC's final-salary pensions and much of the public sector is that the BBC has a funded pension scheme, whereas the pensions of state employees (apart from those in local government) are typically paid directly out of general government revenues.
But the distinction has become more academic than it was, following a massive increase in the deficit in the BBC's pension fund (also announced today), from £470m at 1 April 2008 to around £2bn at 1 April 2009.
There'll be a new three-yearly valuation of the current position, but it's thought that the deficit has fallen only a bit from that £2bn (a recent reduction of the benefits paid to those who leave the BBC may have eaten into the deficit).
The trustees of the BBC's scheme believe this more-than quadrupling of the deficit is not a significantly worse performance than that of similar schemes. Some will query that: the 2008-9 deepening of the deficit hole was worse than the average for private-sector funds in deficit, according to data from the Pension Protection Fund (the PPF uses a different valuation method).
That said, the lack of any substantial reduction in the size of the deficit during the past 12 months may have been beyond the control of the funds' advisers and managers. It is largely attributed to a fall in the yield on AA corporate bonds, or the discount rate for putting future liabilities into today's money - when the discount rate falls, the value of liabilities automatically rises (see my post "BT: a blacker pension hole" for a detailed explanation of the link between the price of bonds, the bond yield and the size of a fund's liabilities).
Whatever the cause of the big deficit, the important point is that there is a whopping deficit. And under pensions law introduced by the previous government, it is a very significant debt of the corporation which needs to be closed.
Which is why - at a time when the government is grappling with massive public-sector borrowing - what is happening at the BBC now looks very similar to the pressures on other public-sector pensions.
To state the obvious, closing the pension-scheme deficit while maintaining benefits payable to BBC employees would require a very significant increase in payments into the scheme, from employees and from the BBC. And the BBC's directors have taken the view that licence-fee payers won't tolerate a rising share of the licence fee being deployed to support the future pensions of BBC staff.
This is obviously moot. It'll spark something of a debate within the BBC (ahem).
So what is the BBC actually proposing? Well having already closed the pension scheme to new members in 2006, it now wants to massively reduce the future benefits of some 17,000 contributing members.
There'll be lively debate about whether its plans - very similar to those at Marks & Spencer 18 months ago that sparked massive controversy - are in fact more generous than simply closing the scheme altogether to all future contributions.
This is quite complicated, so bear with me.
In the BBC scheme, the entitlement is that for every year worked an employee can expect to receive an annual sum on retirement equal to 1/60 of his or her annual salary.
So working for a year on a salary of £35,000 generates a pension in retirement of £583.33. And if an employee were to work for the BBC for 40 years and were paid £35,000 in his or her final year, the employees' pension would be 40/60 of £35,000, or 2/3 of £35,000, which is just over £23,000.
Here is where it gets a bit tricky. Working a year will still generate a pension equal to 1/60 of salary, but each of those sixtieths will be worth less than they were.
How on earth can that be?
Well for two reasons. First of all, whatever happens to actual salaries, the pensionable salary of staff will in the future rise by no more than 1% a year.
So if an employee is promoted and receives a 10% increase in salary, that won't generate a 10% increase in pension, as it would have done in the past: it'll only generate a 1% increase in pension.
And there's a second sense in which those sixtieths have become much less valuable.
In the past, those sixtieths were more than protected against the effects of inflation. No longer.
The value of any previously earned pension is currently increased every year by RPI inflation plus 2%. Any new sixtieths will increase in value by 1% per annum, with no protection against inflation.
In other words, even for those approaching the end of their careers who don't expect their salaries to rise much, the real value of future contributions to the scheme has been very significantly reduced (unless of course we're about to enter a period of sustained falling prices or deflation, in which case up-rating the sixtieths by 1% would be top hole).
What does it all mean?
Well, when a BBC employee looks at his or pension statement under the new arrangement, the value of his or her "earned" pension should not change. The pension entitlement already built up should be protected and proofed against inflation (or so I am told). But there will be a fall - in many cases a big fall - in the projected value of the pension aged 60.
For those relatively early in their careers at the BBC, who expect their salaries to rise sharply, the impact will be so great that they would probably be bonkers to make any future contributions to the scheme - though they'd almost certainly want to retain whatever benefits they've already built up.
Even those on relatively high salaries, who don't expect their earnings to rise, will have to think twice about whether it makes sense to continue with contributions.
The changes will inevitably cause a massive outcry among staff, as happens in the growing number of private-sector companies which close their schemes to all future contributions or cap their liabilities in this way (although I should point out that not all stretched companies reduce benefits to this extent: BA, which is arguably in much worse financial shape than the BBC, has kept its seriously indebted schemes open for contributions).
The point is that members of defined benefit or final salary pension schemes almost never read the small print. When they receive a statement from the BBC or another employer saying that if they work till retirement they would receive a salary of £XX,000, they regard that as a cast-iron promise.
So when they're told that it wasn't a promise, but a projection based on variable assumptions, well they tend not to be amused.
I imagine therefore that George Osborne and David Cameron will be looking quite carefully at how and whether the BBC gets its pension changes through. Because if they could impose a similar 1% annual cap on future additions to public-sector employees' pension entitlements, the savings would run to billions of pounds per annum.
Update 1030: On reflection, the inflation plus 2% annual increase in the sixtieths currently eamed by scheme contributors - to which I referred earlier - must be the actuarial assumption of what will happen to salaries for the calculation of scheme liabilities, not the actual formal guarantee to scheme members. Contributors must be receiving protection for their sixtieths equal to RPI inflation - which will now fall to 1% for future sixtieths.
Update 1205: This is where I begin to fear I've stepped through the looking glass, because it looks to me as though the BBC proposals would in fact reduce the value of accrued or earned benefits as well as new ones.
Here's the relevant excerpt from the BBC's booklet on the changes:
"If you choose to remain in the scheme for future service, benefits built up before 1 April 2011 will continue to increase to your retirement (or when you leave the BBC) in line with annual salary increases, limited to 1% each year.
"If you choose to join the DC (defined contribution) plan for future service you will become a 'deferred member' of the scheme and stop building up benefits in the scheme. The benefits you have built up will increase broadly in line with inflation to your retirement".
What that implies is that even members' so-called "earned" pension will only be up-rated between now and retirement at 1%, not at the inflation rate, if they stay in the scheme.
In other words, unless deflation sets in, there would be a real cut in the value not only of future entitlements but also of the pension that contributors had thought was earned and guaranteed.
It appears that only if members leave the scheme can they be certain that past benefits will be up-rated in line with inflation.
There appears therefore to be a big financial incentive for everyone to leave the scheme.
Some may see what the BBC has done as a way of effectively closing the scheme without saying that in so many words.
What is clear is that these reforms are not simple.