Dear Sir,

“BRITISH Airways and Iberia merger hinges on pension deficit” is last Saturday's Daily Bulletin front page headline. BA's pension fund has a deficit of 3 billion pounds but the killer fact is that the deficit is bigger than the company's market value. Does this mean that Britain's number one airline is technically bankrupt? Last weekend Ray Durkin had a letter on the Royal Mail dispute. It also discussed the GPO pension black hole. This has been estimated at £6.6 billion, double that of BA. That dispute is, at base, about privatisation - Royal Mail (and the Government?) wants to sell out. Iberia and BA are trying to cut staff and are also threatened by strikes. Why anyone would want to saddle themselves with the monster problems of these companies escapes me.

In the past actuaries estimated that to provide a comfortable life time pension of 60% of the final salary required annual funding of 15% of the employee's pay. Over a working life of 40 years this amounts literally to a fortune, way beyond the will-power of most to accumulate voluntarily. Many companies contributed 10% and the pensioners to be the other 5%. Actuaries, like the banks' investment gurus, have made calamitous misjudgments over life expectancy and stock market returns. Less money is coming in from dividends, stock values have fallen considerably while outgoings are more as people live longer. With the landslide election of Labour after the Second World War the Government introduced the Welfare State. At this time the life expectancy of men was 65 by coincidence (?) the age their pension was set to start so for many it was pie in the sky (literally!). Now men live 11 years longer.

These actuarial errors have been compounded by companies taking pension fund holidays. In the case of the GPO 13 years. In plain English the workers continued with their monthly contributions (they had no other option) but the company stopped paying theirs (and that was legal!). Whatever the depth of debt these numbers are meaningless for the man in the street – how many zeroes are there in a billion? If they said that every GPO Postman and every BA Cabin Staff pensioner faces a pension 2/3rd less than they expected is more relevant, much more shocking and explains some of the fervour of the strikers.

BA and the GPO are just the tip of the iceberg. The fallout may be much greater on an individual level than the debt we have communally incurred in the banking crisis. Many funds are already technically in a deficit that will only increase. The chasm in these companies is being hidden temporarily by existing pensioners being paid not from their retirement kitty which is now empty but by today's contributions from their working colleagues. This is also the case with the state pensions of Spain and the UK made worse by increasing numbers of pensioners, decreasing working age population and higher unemployment. In the UK nearly all companies have ended their final salary provision for new recruits. The Government is raising the retirement age by one year. These moves will be largely ineffective as demographic pressures overwhelm the ability of pension funds both state and private to honour their payouts. One likely political solution is to unlink pensions from inflation then continue quantitative easing (printing money) and so devalue the pound. This could allow pensions to be paid “in full” in numerical terms if not for real. A more radical & long term solution would be if the Government reversed its policy and encouraged smoking. It has been estimated that if Westminster set a target at 60 per day at a stroke (again literally!) life expectancy would drop 11 years back to 65 and tax revenue soar, a win-win outcome for the Chancellor of the Exchequer.

Joking aside I hope I've got this all wrong.

Mike Lillico, Playa de Palma

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