(From “Pensions Age” Magazine October 2012)
Boris Johnson, the Mayor of London, likes to see himself as a white knight leaping, as he puts it, “… to the defence of unfashionable causes” and in a recent article in The Daily Telegraph the cause he espouses is that of the Energy multinational BP. The corporation has apparently been threatened by a federal court in the United States with, in Boris’s words, “…and absolute crippler of a fine [which] some people say …will be in the region of $40bn”. Whether this is remotely likely I have no idea – it would be a sum that is nearly a third of BP’s market capitalisation of $135bn and would bring the very future of the company, at least in its current form, into doubt. Boris Johnson worries about this – and he is right to do so not least (in my view) because of the potential consequences for the members of the various BP Pensions Funds. But where I take issue with the Mayor is his statement that he needs “to speak up for everyone whose pension depends on BP shares” because “A lot of our pension funds have traditionally invested in BP shares, and if BP shares go down then that is bad news for UK pensioners…”
If a company the size of BP gets into serious trouble it is not good news for anybody but Boris is being alarmist and quite wrong to be so specific about the effect on UK pensioners. I am told that at the time of the Deepwater Horizon disaster in March 2010, when the company’s market cap. was around $180bn some $30bn of this was held by UK pension funds. In aggregate this is a huge sum and, in aggregate, if the unit share price falls this total value falls substantially as well - this is probably what Boris was referring to. But the reality is that it is doubtful if any single UK pension fund suffered materially as a result of this share price fall nor that any Fund would suffer if such a fall, or worse, happened again. A prudent investment policy, which all UK Pension Funds are statutorily required to follow, would preclude any fund having more than a fairly small percentage of its investments in any one Equity. In the case of the Fund of which I am a Trustee, for example, no single Equity represented more than 0.4% of our total investment at the end of 2011 ( although in theory we could have a higher percentage in one Equity if we chose to do so). It is also the case that a significant proportion of the Equity investments for many Funds is in vehicles which track indices like the FTSE and that if BP, or any other member of the FTSE, suffers a fall that is greater than the FTSE as a whole then the Fund’s holding in BP would decline anyway. There is a sort of self-correcting mechanism here which automatically favours investments in the more successful equities.
So if no individual pension fund has suffered significantly in the past, or will suffer in the future, from the collapse of the share price of one Equity like BP this, of course, means that contrary to what Boris Johnson is saying it is not “Bad news for UK pensioners” at all. As I mentioned, the real potential casualties from BP’s difficulties are BP pensioners and I am sure that the Trustees of the BP funds will be paying close attention to their sponsor’s covenant in these difficult times. But the BP fund is in the Top 10 of UK Defined Benefit scheme in respect of Assets Under Management and has, given the difficult economic times, a satisfactory funding ratio. I am sure that the BP Fund Trustees are not being complacent but it seems to me that it would only be in the case of a successful predatory takeover of BP that the status of the Pension Fund would be brought into question. And if that had been going to happen surely it would have been in the first half of 2010 when the value of the company halved in a few weeks following Deepwater Horizon?
To return to the Mayor of London and his defence of unfashionable causes. The cause that I would like to see him and other politicians pick up is that of our private sector retirees of twenty, thirty and forty years’ time. Public sector employees have, whatever they might think or say, been offered a Pensions deal which though not as good as in the past will still, in the main, give them a secure retirement. All too many private sector employees, however, have been offered no deal at all. If ever there was a ticking time bomb – and genuinely “bad news” for (future) UK pensioners - it is this. This is a real cause to “unsheath your columnar Excalibur” for Boris!
Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.