Two European nations are considering taking over public pension plans, converting their assets of approximately $34 billion into cash for general government use and turning the plans into pay-as-you-go systems.
The latest example is the United Kingdoms attempt to take over the £20.1 billion ($31.3 billion) Royal Mail Pension Plan, London as part of a plan to partially privatize the postal company.
For European governments, taking over pension assets means one-time cash infusions that can be used for operating expenses or to pay down government deficits without recognizing the liabilities until the year theyre paid. But John Ralfe, an independent investment consultant and former head of corporate finance at Boots PLC, Nottingham, England, called the proposed takeover a magic trick.
The Royal Mail pension assets would go into the governments coffers, Mr. Ralfe said. They get a windfall of (£20) billion, which is a complete fiddle.
A 2003 accounting rule adopted by Eurostat, Luxembourg, the statistical office of the European Union, permits the one-time recognition of the surplus. A Eurostat spokeswoman cited 11 historical examples of pension obligation takeovers back to 1994, including the €5 billion infusion the Belgian government received when it took over assets of Belgacom SA in 2004.
The Royal Mail proposal, if approved by Parliament and the European Commission, would immediately move the pension funds cash and government bond assets into government coffers, about one-third of total assets. Cash proceeds from the sale of other assets would follow. To cut costs, the plan was closed to new members as of March 31, 2008, the retirement age raised and the method for calculating retirement benefits amended, according to the Royal Mail Group Ltd. website.
Eleven managers would be affected, according to list of firms as of March 31, 2008, the most recent data available, though three firms run the vast bulk of assets. Hermes Investment Management Ltd., London, runs six active mandates, including private equity, emerging markets equity and U.K. real estate, which together constituted 36% of total plan assets. Legal & General Investment Management Holdings Ltd., London, manages two passive equities portfolios one for U.K. and one for international ex-U.K. each worth about 13% of plan assets. And Barclays Global Investors, San Francisco, runs an active debt and cash with swaps overlay portfolio, also worth about 13% of total assets.
A spokeswoman for BGI declined to comment. Spokesmen for Hermes and L&G did not respond to requests for comment.
Royal Mail CEO Gerry Degaute did not return multiple requests for further information.