A quadruple pension whammy
Quote:
Originally Posted by
Snoopy
1.543%. So it has almost halved since EOFY2018 (was 2.85%) and more to come!
At 19th May, the date of the pro-forma balance date, the rate was 1.77%. So it has come down a lot more, even in just six weeks.
If it gets down to 1% then PGW might need a $20m (not $10m) capital injection into the pension scheme, assuming the earnings of the scheme remain flat. But if interest rates fall, then those fixed interest returns will fall as well. So even more money will have to be pumped in just to keep the future earnings stream steady.....ouch....ouch
Ten year government bond has recovered to '1.56%' at the end of 24th July. But Westpac economists reckon it is headed for 1.0%!
Quote:
Originally Posted by
BlackPeter
Actually - quite stupid method to determine the required capital for a pension schema. I am wondering what they are doing at the point in time the interest rate turns negative (as it already is in some parts of the world - i.e. this is a when, not an if)?
Wouldn't they need in this case an infinite amount of money to fund their funny schema?
Quote:
Originally Posted by
winner69
Is a dilemma BP butthey will find a ways around it
https://www.ipe.com/pensions/pension...016338.article
“This is for a pure economic reason,” he adds. “If a pension fund makes a promise to stakeholders, it cannot pretend that the promise is as strong as government guarantee. Pension funds cannot print money. A promise a pension fund makes to stakeholders is no different from a promise made by a corporate to repay an investor. Pension funds’ strategies should reflect that dynamic when they think about discounting and matching.”
Maybe the 'get out of jail' tactic is to let those vulnerable pensioners get so old that they are unable to legally fight back? A ninety year old in their sick bed is ripe for exploitation. What would they do if PGW were to 'solve' their 'pension plan crisis' by ceasing to pay them?
"We cannot pretend that the promise of a pension is as strong as government guarantee."
Sounds like a good line for Stephen Guerin to roll out at the September AGM.
I abstained from voting at he recent SGM where the capital repayment was voted on. I was for a capital repayment. But I think just $10m of that repayment diverted to bail out the pension scheme (for the moment) would have been a good decision. Both for the pensioners and for shareholders as it would remove a significant reduction in funding uncertainty. And markets do not like uncertainty!
The problem has not only not gone away, it is only getting bigger in relative terms. I think we are now effectively back to FY2016 when a five year bail out of the pension plan (so far ineffective) was announced.
Whammy 1/ 10 year government bond rate, (that determines the pension scheme discount rate) down from 1.77% to 1.56% since last disclosure in mid May.
Whammy 2/ Reduced interest earned from underlying fixed interest investments that fund the pension scheme is consummately reduced. So more capital will be needed to generate the budgeted income.
Whammy 3/ As the scheme beneficiaries get older and payout requirements get closer, there will be a need to move more of the portfolio to fixed interest investments with less to growth assets.
Whammy 4/ The size of the funding company is now significantly reduced. Instead of PGW backing the pension scheme, we now have a much smaller company PGWRR that is required to service the pension scheme deficit.
I think that if pensioners are to be paid their dues, then we shareholders will need to put $20m from here into the pension scheme in the end. It could even be $30m if those interest rates stay stubbornly low for ten years. Why as a shareholder am I concerned? Because PGW is now capitalized for borrowing up to $70m to meet seasonal financing requirements. And if close to half of that funding must be fed into the pension scheme, then PGW Retail will not have the capital to stock their shelves. And that means customers will go down the road to buy their supplies from the opposition. This has the potential to turn ugly for both pension scheme beneficiaries and shareholders!
SNOOPY
discl: worried shareholder