Thursday, 16 February 2017

Tata Steelworkers Pensions

Workers at Tata's Port Talbot steelworks have voted to accept a reduction in their pension entitlements, as part of a plan to save the steelworks.. It amounts to Port Talbot workers handing over a large chunk of capital to Tata for nothing. The workers essentially made the decision with a gun held to their head. They were faced with a choice of either handing over this large chunk of their pensions to Tata, or face the possibility of the steelworks closing, thereby not only losing their jobs, but also seeing a chunk of their pension entitlement disappear anyway, as the pension fund is unable to meet its commitments. There are a number of lessons from the experience.

Firstly, the situation that the steelworkers find themselves in is a consequence of not themselves owning and controlling their pension fund. Company pension funds, and this applies to those funds run by local and central government for their workers, as well as nationalised industries, are legally owned and controlled by the company, despite the fact that the money paid into the fund comes from the workers. Who can be surprised that where workers do not have ownership and control of their own pension funds that they will end up being screwed by those that do exercise such ownership and control?

Anyone who has simply followed the news over the years will have seen the experience workers had with their pension funds in the hands of people like Robert Maxwell or Phillip Green. But, even where such funds are not simply taken from the workers or mishandled, BBC's Panorama some years ago showed that the very structure of such funds amounts to workers more or less simply throwing away a large part of the money they pay into their pension funds. Panorama showed that often more than 60%, and sometimes as much as 80% of the money that workers pay into these company pension funds, simply gets swallowed up in various commissions, fees and other costs of the pension fund managers, and others along the way, rather than actually going into buying financial assets to provide the future revenues workers require to cover their pensions.

Workers are often again faced with a choice with a gun to their head. The incentive to join such a company pension scheme is that the company also puts money into it alongside the worker. But, this is really an illusion. Pensions are deferred wages. In order for workers', for labour-power, to be reproduced, workers, as a class, have to be paid wages that are, on average, sufficient for them to live for their entire life, not just their working life. As a class, workers must be able to cover the costs of raising their children prior to those children starting work, and they must be able to cover their own needs, when they have retired, via some form of pensions or savings.

So, if workers simply were paid wages that enabled them to make these provisions for themselves, whether individually via their own savings, or collectively by setting up their own social insurance schemes such as they used to have via their own Friendly Societies, Co-operatives and Trades Unions, that wage would itself incorporate the contribution that the employer currently makes into such funds, be they company pension funds, or state run National Insurance.

But, worse than that, over the last thirty years, employers, including state employers, notably in relation to the Local Government Pension Scheme, took a contributions holiday. In other words, they did not make their contribution into the fund, arguing that the funds were adequate to cover future pension liabilities. For private companies such pension holidays went straight to the bottom line of the company's profits, and was paid out to shareholders. For the state and local state, it went to keep down tax and Council Tax bills, at the workers' expense. A similar thing applies to all of those company pension schemes run by the old nationalised industries during that time. It is part of the reason for there being huge black holes in such company pension funds, now unable to meet their liabilities. It is not as the Tory media would have you believe because workers have dared to live a few years longer!

But, its not just these company pension schemes that this applies to. As I set out some time ago, it applies to the state pension too. For the first fifty years of the state pension, the majority of workers did not live long enough to enjoy more than two or three years of the pension they had paid a lifetime to create. Many did not live long enough to draw any pension, and the workers worst affected by that were all those that had the heaviest, dirtiest jobs, and whose lives were blighted by a range of industrial injuries and diseases.

Workers have had no more ownership or control over the state pension than they have had over the company pension funds, and both have been operated not for the benefit of workers, but for the benefit of capital. In recent years, the state pension has risen, and been given the protection of the “triple lock”, but that comes after all those decades when workers paid into the state pension fund without living long enough to take out of it; it comes after years of the state pension being a paltry amount; and even now the state seeing workers living a few years long – again only on average, because the workers in the heaviest jobs still lag behind in life expectancy – has unilaterally changed the terms, demanding that workers work until 66 and above, rather than 65, before they can even begin to draw that pension. In a rich country, with all of the advantages that the technological revolution has brought in raising productivity, workers should be retiring earlier, not later.

But, there is another reason that the company pension schemes, and people's private pension funds, have failed to meet current pension needs, as I have set out before. The media still talks about rises in stock markets as being beneficial for pensions, when, in fact, the opposite is the case. In the 1990's, when stock and bond markets rose sharply, pension contributions should have also risen sharply, so that those contributions could continue to buy the same quantity of shares and bonds. Instead, companies used the inflated prices of those assets to justify taking pension holidays.

Suppose, workers pay £100 a month into their pension fund, and the average price of shares is £1. Each month, they buy 100 shares. If each share produces £0.10 of dividends, then the pension fund generates £10 of revenue each month, to cover pension payments. But, if the price of shares rockets to £10 per share, the same contributions now buy only 10 shares, and with each share producing the same £0.10 in dividends, the £100 of pension contributions, now only generates £1 of revenue each month to cover pensions.

Firms obviously did not want to increase workers' wages so as to enable them to make the much higher level of contributions required so as to buy the same number of shares and bonds, to fund their future pensions. Nor did the firms want to make additional payments into the fund themselves. Instead, they made the totally ridiculous assumption that the yield on the shares and bonds would remain the same, and that as the paper value of the assets in the fund had shot up, that would mean greater future revenues from it. In other words, if £1 million of shares was in the fund, and rose to £10 million, then these shares would continue producing a 10% return, so that instead of producing £100,000 of revenue, they would now produce £1 million of revenue.

That, of course is crazy, because it assumes that interest/dividends/yield are somehow a natural property of the financial asset, in the same way that apples are a natural property of an apple tree. There is no reason that because the price of a share rises ten fold, the dividend paid by such shares will rise ten fold, because that depends on the profits of the firm rising ten fold, so as to be able to pay these higher dividends. And, in fact, that has been seen, because the more the prices of these financial assets rose, the lower the yield on them became.

The pension funds, then compensated for that, by realising that instead of paying out pensions from the revenue obtained on these financial assets, they could instead simply sell some of these financial assets whose paper prices had been inflated. This is the basis upon which the media see such bubbles in asset prices as being good for pensions. But, this is just a repetition of what happened to the landed aristocracy in the 18th and 19th centuries. The landlords, borrowed money so as to sustain their lavish lifestyle, and paid off their debts by selling some of their land. But, as they sold land, even at higher prices, that meant their ability to obtain revenue from rent, was thereby undermined. 

By failing to increase the actual quantity of bonds and shares in pension funds, which would have required a huge rise in pension contributions, and by using the paper capital gains in the underlying assets to fund current liabilities, the pension funds, similarly eat their own capital, and so undermine their future revenue producing capacity, required to meet future pension liabilities. That is again a major cause of the current pension black holes.

So, when I heard Frank Field discussing the situation facing Tata workers the other day, it illustrated just how little such people actually understand the economic laws that determine pensions. Field talked about the possibility of the Tata workers' pensions being helped out in the future as interest rates rise. But, that is pretty impossible, and again shows that there is a total failure to understand the economic basis of such interest.

There are two ways that a rise in interest/yield on the underlying assets of pension funds might arise. The first way is that the general rate of profit in the economy might rise very sharply, so that every company produces much larger masses of profits, thereby facilitating the payment of much higher dividends. If company shares have risen ten fold from £1 to £10, then if profits rise by twelve fold, the amount that can be paid out in dividends can also rise twelve fold. Instead of each share producing £0.10 of dividends, it would then produce £1.20 in dividends, so the yield would rise from 10% to 12%.

Is that likely? No. The period of the sharp rise in the general rate of profit occurred from the late 1980's, through to around 1999, and continued at a slower rate of growth after that period. From around 2012, that increase in the general rate of profit has stalled, and from here on in the long wave cycle, the general rate of profit is likely to be squeezed – as also happened in the 1960's and 70's – as wages rise, whilst productivity slows. In the period when the general rate of profit was rising sharply from the late 1980's onwards, a growing portion of those profits went to finance speculation rather than productive investment, which is the basis of expanding future profits. According to Mark Carney, at the Bank of England, the share of profits going to dividends, in the 1970's was around 10%, whereas today it is around 70%. A similar picture exists in the US.

In other words, the sharp rise in asset prices, be it shares, bonds or property, caused the yields on those assets to fall. To compensate, and keep the yields up, a larger and larger portion of profits had to go to pay dividends. Its hard to see, how the portion of profits going to dividends could be increased from here, without bringing actual productive investment to a more or less complete halt, thereby creating a recession, and undermining future profits.

The only other way that yields can rise, from here, is if asset prices crash. In other words, if profits have risen not be twelve fold, but only by 1.2 fold, so that dividends might rise correspondingly from £0.10 per share to £0.12 per share, then if share prices fell back from £10 per share, to their original £1 per share, that would mean that the yield would rise from 10% to 12%. That of course, would be anathema to the Tory media who see high asset prices as a virility symbol of capitalism.  The Dow Jones Index has risen more than 20 fold since 1980, way ahead of economic growth.

But, of course, for all those workers who have paid in their contributions over the last thirty years, when asset prices were being astronomically inflated, and whose contributions thereby accumulated less and less capital, that will not change the revenue their pension fund now obtains. It will simply represent a higher yield on those assets, but in terms of the absolute amount of earnings available to pay out pensions it will be unchanged. The real benefit will be for those current workers whose pension contributions would then buy a larger quantity of shares and bonds to cover their future pensions.

The further point here then, is that if workers had had ownership and control of their pension funds in the last thirty years, they would have been able to use their contributions to invest in real productive-capital, which would have been producing real profits in the intervening period. They could have used their pension contributions to build up their own worker-owned co-operative businesses, rather than their contributions going to fund lavish lifestyles of bankers and fund managers, and to finance the unproductive speculation in shares, bonds and property that destructively created massive bubbles in those assets.

The answer lies in workers' hands for the future. But, they have to be prepared to take it, and to collectively take responsibility for their own future rather than subcontracting it to their enemies in the capitalist state.

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