The Grumpy Old Man

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Big Bro 3-1....Contracts of Employment, a Salutary Pension Tale....

....A Company's Abuse of Priveledge by Giving Themselves a Pension Contribution Holiday....

I realise that the legal position, particularly in the United Kingdom has changed significantly since I found myself in the situation discussed here, however I feel it important to talk about it as it represents a good example as to what can happen when one is faced with an "over the barrel" contract situation.

At the time of this situation arising, most long-term employment contracts included a clause to the effect that membership of the Company Pension Scheme was a condition of employment. Most of these schemes worked on the basis that each month the employee put into a 'pension pot' a modest percentage of his salary. (For most normal schemes this percentage was around three or four percent.) This employee contribution was deducted at source and in accordance with the legislation of the time, was free of tax. The company matched the employee's contribution to the 'pension pot' with an equal contribution. This arrangement was an essential part of the employee's terms and conditions of employment. The pension scheme (or 'holder' of the pot) was run by an "independent" Board of Trustees. The money itself was invested to provide a return that would pay for member's pensions when pensionable age was reached.

Let's talk specific percentages. For the purposes of this example let's assume an employee contribution of four percent. With the employer agreeing to pay the same amount this could be considered as an up lift of the employee's salary by four percent. Because contributions were free of tax, the effective value of this up lift would be a further four percent of gross salary.(Two percent tax relief on the employee's contribution and likewise for the employer's) Thus it can be seen that membership of the firm's company pension scheme was actually worth an additional eight percent of gross salary to the employee. Of that a total contribution of some twelve percent of this gross salary was made to the pension 'pot'. Note that all this was an essential part of the terms and conditions under which the company offered to employ you.

There were notional protections for the employee built into the legislation which surrounded these pension schemes. But it is Grumpy's view that these didn't go anything like far enough. As an example of these protections, the trustees were legally prohibited from investing in the parent company. In theory, this meant that the employees pension contributions were protected from any effects of financial malaise in the parent company.

While that was the general idea, it didn't always work in practice. Grumpy does recall a situation that arose with one company for whom he worked. One year, the company's annual financial figures were not going to be particularly good and it was clearly the opinion of the board that these figures would have an adverse effect on the share value of the company. Such a fall in the share value could have made the company vulnerable to takeover. As one can imagine, the value of the pension fund was quite considerable and I am sure that it was always a temptation for the board, when in this particular situation, to investigate ways in which this money could be utilised.

The ruse they came up with was quite simple. They decided to give the Company a pension contributions holiday. To effect this, no employer's contributions were made to the 'pension pot' two or three years on the trot. This could be a considerable saving for a large company, amounting to approximately four percent of the company salary bill. This of course allowed them to maintain the share price, increasing the company's 'value' (discouraging takeover offers) and continuing to pay some form of dividend to the company shareholders.

When I heard that this had been done I was absolutely incensed as I saw two things. First off, I believe that the company was in breach of its contractual agreement on the payments due to me. Secondly, I had in effect had a four percent salary cut imposed on me with no consultation whatsoever.

At the time when this happened, the company was quite large and consisted of many small to medium-sized sites scattered around the country. Union representation was, at best sporadic and uncoordinated, at worst totally ineffectual. The site I was working on at the time had probably thirty percent union membership. Although I was not a member, a friend of mine was effectively the "works convener" for the site. I did discuss the matter with him and he agreed that it was 'not on' and that he would consult with his union colleagues. In actual fact at the end of the day the union was again totally useless, refused to see the problem, or didn't have the stomach for a fight. On an individual basis, staff invariably saw it affecting them twenty or thirty years away and were therefore also not particularly interested in a fight. So at the end of the day staff effectively finished up with a reduction in their overall remuneration for a couple of years. Obviously, if the company do this too often it is possible that the pension pot may have insufficient funds to cover staff's pensions when they retire.

So there you have it, the company actually had us all over a barrel, this being exacerbated by the fact that staff most affected were scattered far and wide and whatever coordinating organisation was available actually couldn't care less.

You might observe that Grumpy imself chose to take the offer of employment made by this company. But when you are actively looking for work, are you more interested in the duties of the post on offer or the potential effects of the more obscure terms and conditions of employment? Be honest, you, like Grumpy look at the 'task' on offer, and perhaps the money, but no, never the small print in the Ts&Cs.

Such situation is not always the case and I site as an example the current long-running dispute between staff and management at Aer Lingus involving a financial hole in the staff pension fund. From memory, I recall that this hole in their pension pot is some four hundred million Euros. I take my hat off to the unions who are like a dog with a bone and are not letting go of the problem until it is sorted. I accept that I do not know exactly how this deficit arose but I suspect that it goes right back to the pre-privatisation era when Aer Lingus was nationalised and owned by the government. One can only surmise that the government assumed they would pay retiree's pensions as and when they went along. (A typical government Ponzi scheme about which I will be writing later.) Perhaps the only difference between this and the company for whom I worked for, is that Aer Lingus is much more unionised and actually operates from a far smaller number of sites, thus making coordinated action much simpler to organise.

So do beware, in the distant future, some of these terms and conditions may bite you in a very painful place.

see also comments made in the Forum by Geoff on 28 July.