The Definite Article

The existing pension scheme, run by Ineos, the employer, is a defined benefits scheme.

The particulars of the scheme are as follows:

Current employees accrue rights to their pension over time. As they work, part of their annual salary includes 1/60th of their final salary to be paid upon retirement, but not before age 60.

The best you could have done under this scheme, because of Scottish law, is leave school at 17 and begin working at the Grangemouth plant and retire at 60. That's 43 years of work for Ineos. The pension scheme is then 43/60ths of your final salary, or a little more than 2/3rds.

But most folks only work there for 30 years - some start earlier than others, but most retire between 20 and 30 years of service.

Average pay is £30,000 a year, but most folks at retirement are at the higher end of the pay scale, around £45,000 a year.

So most folks are going to make between £15,000 and £30,000 a year, although it's theoretically possible to be taking home a maximum of £43,000 a year at age 60.

If you've made it to age 60 in Scotland, your average life expectancy is another 18 years.

Ineos claims that the cost of their pensions scheme is growing and that they can no longer afford it.

The union, Unite, claims that the new pension deal offered is unfair.

Employer perspective

First, is the pension getting more expensive?

It costs Ineos more to support their pension than it costs other similar companies. Other companies only pay an average of 16% of their wage bill for their pension. So Ineos is paying more than the average.

It's also true that pensions have been getting more expensive in general. It feels odd to write this during a liquidity crisis, but the world is awash with capital - and all of it is out seeking a return. This means that return generating assets get bidded up until the return is lower.

Pension funds are not any different. They have to bid for return bearing assets, too. And the returns per unit risk have fallen as more capital competes.

In general, the rate of return on annuities has declined to rates that are pre-war. By which I mean World War I, not II. It's been a long time since we've seen economic conditions like these, which indicate a fundamentally low rate of return on money. The amount of money required to fund pensions is inversely related to the return on that money and the difference can be shocking.

For example:

Let's take the average worker at Grangemouth, who has 20 years to retirement and makes £30,000 a year.

Now let's make some basic assumptions:

1. 2.25% annual increase in pay
2. 50% final salary pension
3. 10% return on investment

The final salary will by just over £46,000.

To fund your pension of £23,000 for the rest of your life, your employer would need to put away £300 a month until you retire.

Where can you get a 10% return on your investment?

Investments in this class are now very risky, not suitable for retirement funds. So let's assume a far more realistic return on investment: 4%.

What does the fund look like now?

Now, to fund a pension of £23,000 a year for the rest of your life, your company suddenly has to put away £1600 pounds a month. A drop of 6% corresponds to a 5.5 times multiple in the amount that you have to pay for pensions.

So, yes, the pension scheme has become more expensive - and it will be much, much more expensive in the future.

Employee Perspective

From the employee perspective, it's worth figuring out whether there's real benefit in a defined benefits pension. If the pension is expensive and getting more expensive, then you'd want to make sure that you get your pension.

If the pension fund folds, the company will have to cover, which in some cases may push them completely under.

If the company folds, you'll lose your defined benefits pension.

If a company goes into receivership because of pension fund default, the usual outcome is for the pension liabilities to be wiped clean and for the company to continue on under new management, only without any pension for anybody.

If you have a defined contribution scheme, then this usually amounts to an immediate raise for everyone in the company, with then automatic enrollment in a defined benefits scheme, with options to choose which scheme to take.

If I were in the position of the employees at Grangemouth, I'd ask for the defined contribution scheme as it stands to be capitalized fully by long term debt paid for by a one time charge, then for it to be closed. That means that everyone who has already been assigned rights out of it - including current workers - will receive those rights pro rata up to the day that the fund was closed.

And from that day forward, the company should be asked to give a 10% raise in pay to everyone who was covered under the old pension - and then automatically enrolled in a new, severable, defined contribution pension scheme that extracts that 10%.

Employees then have the choice afterwards of disenrolling in the scheme or choosing a different one, should they be clever or risk seeking.

The cost to the company will be the one time charge of winding up the defined benefit scheme, with the return on that investment being the full cost of pensioning their employees in the future. They never have to worry about it again.

The benefit to the employee will be a big bump in immediate pay, plus a retirement fund that won't go bust if their company does.

Final Recommendation

Ineos and Unite have a common interest in seeing this come to a resolution where a defined benefit scheme saves the company a bundle and puts a bundle in the pay packets of the employees.