The Sunday Times(29 Apr) has an article related to the Bmi pension issue - makes for an interesting read.
John Smith jumped up from his armchair as the letter box snapped shut. The pilot rushed into the hallway of his Hampshire home and tore open a letter from his employer, BMI British Midland.
As Smith (not his real name) read the letter from Clive Grimley, chairman of the pension trustees, an awful truth dawned on him: his plans for a comfortable retirement had been dashed.
Lufthansa, BMI’s owner, was washing its hands of the carrier’s pension scheme. A deficit of £180m (€220m) meant there would not be enough to pay the promised pensions.
Instead, the German airline was dumping the liabilities on the Pension Protection Fund (PPF), which is normally used to rescue the retirement plans of insolvent companies. Lufthansa would also provide an £84m sweetener to make up for some of the shortfall in members’ pension savings.
Smith, in his early 50s, had been looking forward to a retirement income of £43,000 a year — he reckons he will now be lucky to get £27,000. “Most of the pilots are in a state of despair and anger,” he said.
The PPF is bad news for well-paid workers, such as pilots, because it guarantees a maximum of only £34,000 a year for those who have not yet retired. It does not cover most inflation-linked increases to pensions, or widows’ or dependants’ benefits.
This is the first time a large, solvent company has been allowed to dump liabilities into the PPF and walk away.
The controversial deal emerged this month as Lufthansa sold BMI to International Airlines Group, owner of British Airways.
IAG wanted BMI’s Heathrow operations but not its pension liabilities. It received a huge discount on the £172.5m headline price after agreeing to take on BMI’s regional and low-cost arms, for which Lufthansa had failed to find a buyer.
The German airline’s jettisoning of the scheme has left pension experts and unions baffled because Lufthansa had pledged to support it after the sale to IAG.
Jim McAuslan, general secretary of Balpa, the pilots’ union, has written to Dame Anne Begg, who chairs the Commons work and pensions committee, asking for an investigation. He has also urged Vince Cable, the UK business secretary, to look into the matter. McAuslan fears other companies will use similar tactics to get out of their pension commitments. “This is a solvent, gold-standard German company transferring a business to a gold-standard British company, and in the process the pension has been ditched under the pretence of insolvency,” he said.
So, what happened?
Lufthansa proposed to continue supporting the BMI pension scheme by setting up a British-based shell company, with no assets, to take over funding responsibility. The Germans would pump £10m a year into the scheme for 25 years. This was blocked by the Pensions Regulator because it was similar to the funding structure it had approved for Polestar, the printing company, which had a deficit of more than £500m. The Polestar scheme collapsed and had to be rescued by the PPF last year because the shell company had insufficient cash to make up a shortfall.
The Pensions Regulator sounded the alarm on Lufthansa’s proposal because the Germans would have had no legal obligation to continue supporting the BMI scheme if something went wrong in the future. The watchdog decided that a safer option for the BMI workers would be to transfer the airline’s scheme to the PPF.
Lufthansa was desperate to end its exposure to BMI, which it took control of in 2009 for about £300m. Since then, it has struggled to turn round the loss-maker — it is estimated to have lost more than £1 billion on the investment.
Lufthansa confirmed it had proposed using a shell company to manage the pension scheme, but said the regulator had rejected the proposal because it was deemed too much of a risk.
John Ralfe, a pensions consultant, asked why the regulator had not used more forceful tactics to persuade Lufthansa to take on the liabilities. “The regulator has very strong powers that it appears to choose not to use,” Ralfe said.
Sources claimed the regulator and BMI’s trustees felt under pressure from Lufthansa to seal an agreement on the scheme. If they had not done so, the deal with IAG could have collapsed, raising the threat of the Germans pulling the plug on their British subsidiary. Under this doomsday scenario, BMI would be made insolvent and the scheme would have ended up in the PPF anyway — but without the £84m sweetener.
Jim Snee, a former BMI pilot who retired in 2008, said the debacle had been a “rude awakening” for members of the scheme. It also sent out a warning to younger people about the value of saving into a workplace pension, he said. “Why would you invest your life savings in a scheme run by nefarious people who aren’t properly policed?”