Pension deficits: Are things really all that bad?
I had a very interesting conversation with David Cowen, FD of Molins (LON:MLIN), yesterday. For as readers may recall I have begun seriously to doubt the widespread reports that company after company is insolvent because of deficits in their pension funds.
I am certainly not an actuary but in essence computation of a surplus or deficit depends upon a number of factors. They are: life expectancy, the rate of inflation to be expected, the yield and capital gains to be expected from the portfolio and, above all, the cost of annuities to guarantee the payment of a pension. This last figure depends upon the yield on gilts where, as I think readers will agree, an entirely absurd state of affairs obtains as a result of Quantitative Easing.
Surely, QE will cease and a yield of the order of 4 or 5% p.a. will apply. Therefore it is wise for the authorities to give a revised and higher yield for gilts to allow pension fund trustees to behave sensibly. Believe me the reduction in the pension fund liabilities to pay/purchase gilts if interest rates are higher is staggering.
Take MLIN itself: The liabilities are circa £300m (which should be contrasted with tangible net asset value of the order of £15m or 75p per share) reduces by £2.5m for each tenth of a per cent gilts yields rise. So a 1% rise means £25m off the liabilities figure.
It does not take a great deal of imagination to see that MLIN’s pension fund could shortly be massively in surplus. If so, MLIN is very cheap indeed at 57p offer.
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The Daily Mail says that out of many hundreds of cases only one of these well off foreigners have been criminally prosecuted for taxation evasion. This, the Daily Mail says, is proof for the Mail’s readers that the world is so unfair. However, the real reason is that HMRC is very reluctant to prosecute since prosecution leads to a very poor return for HM Treasury. HMRC prefers civil settlements with, where necessary, stonking penalties. The Daily Mail does not reflect this fact, partly because it wishes to induce a daily hate and partly because its staff are financially illiterate.
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Finally, yesterday, Caribbean Investment Holdings (LON:CIHL) (formerly the old Belize Commerce Bank) jumped 65%. The company itself said it knows of no reason. I think that the shares are just cheap at 18p offer.
The thrust of argument on Monlins pension defict make a lot of sense; however with a deficit of £300m and a 1% Gilt yield rise reducing it by £25m, it would take a rise in yields from the current 1% t0 13% to wipe out the deficit. So, sadly it does take a great deal of imagination to see the fund at break even, let alone massively in surplus.
Mike,
I in fact wrote that the liabilities are c. £300m. There of course assets. Actually these latter currently marginally exceed liabilities. So it needs very little imagination to go along with me. Or so I imagine.
Simon