Take Diane Abbott – if you dare.  Diane was this country’s first black woman MP and has a reputation of being a bit of a maverick – in other words, she often says things worth listening to and doesn’t always toe the party line.  Given that she’s been an MP for almost 25 years it was surprising that she made a bit of a faux pas recently by claiming that “white people” liked to play “divide and rule”.  Now, although this may not be factually inaccurate – a brief history of European colonialism might provide any required evidence – it’s not really what we expect to hear our MPs say.

Arab autocrats – well, some of them anyway, not the “good” ones in Saudi Arabia or Bahrain, where it seems that democracy protesters can be gunned down in the streets, without raising an eyebrow in the Western media – are also taking a bit of a pounding, metaphorically and sometimes literally and, all of a sudden, media commentators are distinguishing between Shia Muslims and Sunni Muslims; I say all of a sudden but it’s probably been going on for about ten years, since Iraq was invaded.  Is this another example of “divide and rule”?  How much easier would it be for these beleaguered people to topple their despotic, unelected, leaders if they weren’t using much of their energies fighting among themselves?

And what of pension provision in Britain, and the “scandal” of public sector pensions.  Or is it such a scandal?  Or is the scandal more in the private sector?  Why are private sector employees viewing public sector employees as the enemy?  Are they the real enemy of private sector pensions, or would the chief enemy, instead, be private sector directors and executives who are normally comfortably cushioned from the retirement hardship that many of their employees will suffer.  Instead of private sector employees looking inwards, and upwards, the private sector turns its glare on public sector employees and complains that they’re not joining them in the race to the bottom.  A respected American investigative journalist and author recently commented that the Defined Benefit “burden” for US employers, largely relates to the “1%” at the top, and not the other “99%”.  She also described the chief executives of such companies as not so much captains struggling to keep their ships afloat, but “silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their lifeboats” – if only Robert Maxwell had been so lucky.

Is this more of the same, more “divide and rule”?  Who knows?  But we shouldn’t be surprised if it is; such a weapon has a long history of success.

Sticking with the facts: most banking profits come from investment banking, and profits will be down.  Bonuses will, therefore, fall.  Although this will result in a significant fall in dividends for shareholders, somehow executive pay, although perhaps reduced, will fare much better. 

For example, although Barclays has been one of the better-performing banks in the last three years of crisis, it hasn’t earned returns in excess of its cost of capital, a basic measure of success at any company seeking to make profits.  Strangely, however, last year 231 key staff earned an average of £2.4m each – and that doesn’t include the Chief Exec’s able right-hand men who each earned £10m.  And I won’t even mention Bob Diamond (again).  Barclays share price has fallen by almost a third in the last year.  How? Why? What?  Nice work if you can get it.

Surprisingly, shareholders overwhelmingly approve these remuneration policies.  Why do they continually vote to approve these pay-deals for the executives, at their own expense?  They have largely swallowed the hokum that big bonuses are needed to retain and attract high quality employees.  This is, of course, nonsense, perhaps more so now than ever before; there have been lay-offs in the last year or so, and competition for investment bankers is almost non-existent.  Introducing a binding vote for shareholders – although welcome – may not, therefore, make a significant difference, at least until it is realised that investment banking Emperors’ new clothes are not quite covering their assets.

This isn’t just another excuse – do we need one? – to bash our loveable bankers, but what has this to do with pensions? Well, perhaps it’s time for institutional investors such as pension funds to become more involved, and engage in executive remuneration.  Investors have been royally ripped-off for years.  If big shareholders can’t grasp this opportunity to bring a halt to this rip-off, then when can they?  Maybe it’s too easy for the large investors to wash their hands of the murky dealings and delegate such matters to asset managers.  And what of the asset managers?  They have been strangely reluctant – I wonder why? – to vote down any pay proposal packages; just a thought, but maybe the fund managers themselves should be forced to disclose their pay packages?

Business Secretary Vince Cable is already making encouraging noises about his proposed changes; for example, he seems to have set his sights on the back-scratching merry-go-round of company executives sitting on each others’ boards and rubber-stamping unjustified increases. 

Mr Cable’s ideas will be published later this month and the Government’s plans will be included in the Queen’s Speech this spring; it is to be hoped that his deeds match his words, or is this too much to expect from a politician?

A few examples were:-                          

Q: In books written in English each line is printed and read starting at which side of the page?

A: The right

Q: What ‘T’ are people who live in a house paying rent to a landlord?

A: Terrorists

Q: What was Ghandhi’s first name?

A: Goosey

Now there’s little doubt that the incentive of all that cash, the pressure of being under the studio lights and the inquisitorial gaze of the likes of Anne Robinson and Jeremy Paxton, not to mention Vernon Kaye, Bradley Walsh and Jamie Theakston induces a high level of panic, not to mention complete brain freeze in some cases.

I’m not sure however what excuse some people have for giving the answers they have when they’ve had lots of time to think about them.

Unfortunately the DWP provided a similarly disappointing answer for many charities in the results of their consultation on Employer Debt , which were published just before Christmas in the snappily titled “Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2011 – S.I. 2011/2973”

This review offered a ray of hope that the inequity many charities face which prevents them from controlling the build up of liabilities in their pension scheme and forces them to continue funding unaffordable benefits could be addressed.  Unfortunately no, or possibly more accurately, not yet.

The response to the consultation provides some specific comments as follows:-

8 (a). Employers in charitable and voluntary sectors. Some respondents raised concerns about non-associated employers, particularly not-for-profit and charitable employers. These employers would not be assisted by many of the easements available for dealing with an employer debt. Where an employment-cessation event occurred to such an employer the only options were to pay the debt or to use the period of grace. As many of these employers could not pay an employer debt, they had to continue to participate in the scheme in order to avoid one triggering. One respondent suggested that to help these employers, no debt should trigger on ceasing to employ an active member where the employer continued to meet its scheme funding obligations.

9. The Government recognises that some non-associated employers can face problems with an employer debt. The extension to the period of grace, which is provided for by these regulations, was prompted by representations from such a group. However amending the employer debt requirements so that no debt is payable where scheme funding obligations continue to be met would be a much bigger step and would need to be carefully considered. For example, member protection would need to be considered carefully. This would be a change that would go much wider than the subject matter of these regulations and the Government would want to carry out a further consultation.

So a bit of bad news, good news! The bad news is that nothing is going to be done at the moment but there is the option for the Government to carry out further consultation and at least there is at last recognition that this is a major issue.

Unfortunately the response shows a fundamental misunderstanding of the issue of member security as LGPS, and similar multi-employer schemes such as those run by the Pensions Trust and others, are all ‘last man standing’ arrangements. If an employer becomes insolvent then the debt is picked up automatically by the other participants so the member is fully protected. Even if the whole scheme sector collapses the PPF would provide protection, however this is massively unlikely as has been recently recognised by a reduction in the PPF levy for some of these schemes.

So the likelihood of a scheme of this type failing is negligible. Allowing employers to continue to build liabilities which they cannot afford makes this less the case. If an employer exits and makes a contribution over time in excess of the on-going funding level (e.g. at cessation level) then the on-going funding position of the scheme as a whole improves so members are better protected. In addition, other employers are at a lower risk of having to assume responsibility for liabilities for higher risk employers – particularly the case for public bodies such as local authorities who are effectively standing guarantor as things stand at the moment.

Paradoxically both the participating organisations and those administering the schemes recognise the need for these organisations to be able to exit on affordable terms but both are being hamstrung by inappropriate legislation, a piece of legislation which incidentally recently won a poll as the worst piece of pensions legislation .

This is a very significant issue for many charities and its rectification can no longer be delayed. For example, many charities participating in LGPS will undoubtedly shortly be receiving news of further contribution increases as a result of updated actuarial valuations and the organisations affected need to have options.

So if you’re affected by this, lobby your MP, correspond directly with the Pensions Minister, Steve Webb, or make your voice heard through any representative bodies available.

The fund subsequently lost 2/3rds of its value, not least because of the pension scheme deficit. Now I’m not seeking to comment on this case specifically and indeed Henderson’s have signalled they “will vigorously defend these proceedings” but more on some wider pension related implications.

I would have expected that at least when conducting due diligence on the investment Henderson would at least have been aware of the existence of a defined benefit pension liability via accounting disclosures under FRS17 in John Laing’s company accounts. Whilst the FRS17 position would significantly under-estimate the position at least its presence in the accounts would allow investors to make some broad assessment of the risk involved in any transaction and indeed to take professional advice where necessary.

A similar ‘low risk’ asset class is being widely promoted in the market at present, namely that of investment in Social Housing, seen as a new source of long dated, inflation linked cash flows for pension funds now that access to significant levels of similar government securities has all but dried up. However, as a source of pension investment is it precisely the level of pension risk these organisations face which mean these investments may not represent quite as low risk an asset class as at first glance they appear.

Over 150 housing associations in Scotland and around 600 in England and Wales participate in social housing pension schemes related specifically to the sector. These are defined benefit arrangements and both are running very significant scheme deficits. At the last valuation in 2009 the Scottish Housing Association Pension Scheme (“SHAPS”) in Scotland had an on-going deficit of around £160m and a buyout deficit of around £340m while the Social Housing Pension Scheme (“SHPS”) in England and Wales at the last valuation in 2008 had an on-going deficit of around £620m and a £3.4bn buyout deficit. The funding position of both schemes is likely to have further deteriorated to the current date.

A major difficulty is that participants within these schemes do not tend to fully comply with the requirements of FRS17 and so do not disclose their scheme deficit and offset this against their balance sheet value. The schemes use a ‘multi-employer’ exemption under FRS17 which means that if they cannot identify their share of the assets and liabilities under the scheme they can disclose as if the scheme was a defined contribution arrangement, that is purely confirm the contributions paid. 

Most, if not all leading auditors, are uncomfortable with the approach being taken as they have concerns that the exclusion of the full disclosures mean that associations are not making a ‘true and fair’ representation of their financial position. Organisations who participate in local government schemes could also adopt the exemption however most chose not to. This leads to the inconsistent and unjustifiable position where two similar organisations with a similar pension deficit show wildly different net balance sheet positions. 

The SHPS and SHAPS schemes are likely to move towards a basis where deficit contributions will be based upon each associations specific share of the overall liabilities which will make anything but full disclosure less likely. This will undoubtedly mean associations having to bring very significant pensions deficits on to their balance sheets over the next few years with a potentially dramatic impact on their financial position.

Investors in Social Housing products will need to understand the extent to which investment managers have researched this issue, given the lack of accounting transparency, and if it represents an increased level of risk exposure to that suggested.

In addition as income streams to these investment products are deemed preferential over other association expenditure, in a similar way to PFI type investments, the associations themselves will want to understand the implications for their organisations, especially should pension contributions rise or other income fall.

At least in the Henderson case it is likely the pension deficit issue was more transparent and therefore easily assessed. Those using social housing investment will want to be confident that despite the lack of transparency the issue has been properly investigated.

February hosted a long and sometimes confusing conversation about PIPs. Turns out it’s simple,……… honestly!

In a busy month of March we aired our opinions and gave a spring clean to these pieces:

• Transition to auto enrolment will not be automatic
• Watch out older people, Booth and Taylor are coming
• The public sector pensions challenge
• Gender based annuity pricing, Haruspicy and the end of science

Help for schools and colleges showed we are no fools in April with some guidance on FRS17 disclosures.

The joys of spring were not abound in May as we lost an “f” in pensions. There never was one?  I think you’ll ind……..

Inflation and its effects were being discussed in June as another quarter sees the inflation targets go by unachieved. On a more positive note the Actuarial Profession was inflated with a new influx of talented graduates from Queen’s University. We were there to welcome them to the industry and indeed are nurturing some of that talent within our business today.

Individuality was the theme of July’s hot topics. Section 75 Regulations fail to recognise the plight of the unattached charitable organisations among multi employer schemes. And, as tPR guidance on Incentive Exercises suggests trustees start with the view that they will not be in the members’ interests, we ask just how much trustees should assume all members have the same needs?

In August we tried to make sense of babysitting pensioners and whether they were truly responsible enough to take care of their own finances.

September brought another egg to the NEST in the form of NOW Pensions as a rival. All good sport or will it be rotten?

November saw us pushing the limits of data management. Are Trustees using all the tools at their disposal to  improve their data and meet tPR’s  deadline?

December and we are back to de-risking and not much festive cheer. We feature our article in the Actuarial Post.

This will undoubtedly be unwelcome news and cause major problems for around 500-600 organisations participating in GP3.

The Pensions Trust has consistently communicated to participants that it believed that GP3 was classified as a defined benefit scheme as a result of the capital guarantee, (which purely guarantees that the return covers the scheme admin costs – i.e. that the fund value can’t fall), and as such they sought to ring-fence GP3 funds to cover the guarantee by investing in monetary vehicles to provide “security and capital preservation.” To quote the August 2006 Growth Plan Bulletin, “Now that Series 3 assets had to be matched to Series 3 liabilities the promise that a member’s fund could not decrease in value had to be reflected in the Series 3 investment strategy.”

The suggestion in the recent correspondence to participants is that the judgement on the Bridge Trustees case would make GP3 a defined contribution arrangement but that the expected legislation from the DWP would once again return it to defined benefit status – so back where we started.

In 2006 the actuarial advice was that GP3 funds matched GP3 liabilities and that therefore the whole of the deficit with the Growth Plan ‘family’ related to Section 1 (“S1”) and Section 2 (“S2”) benefits. The Trustee now looks to be re-apportioning the liabilities from S1 and S2 to GP3 employers.

The rules of the Scheme allows the Trustee to apportion the deficit as they see fit and until now the Trustee has decided not to apportion the deficit from S1 and S2 to GP3 as this reflected the reality of where any deficit was built up. If there is a shortfall in the funding / investments of GP3 then employers would be liable for any funding required to rectify this, but to suggest that employers should pick up a cost for the other sections by extending it beyond this must be inequitable and highly questionable.

Key questions which organisations need to consider are:-

• Has there been a negative return in the GP3 monetary investments such that would have produced a GP3 deficiency and if so to what extent?
• Is there now actuarial advice that part of the deficit has resulted from GP3?
• Is it expected that the new legislation will affect the Trustee’s power to apportion the deficit?
• If the answers to these questions is no, why has the Trustee changed their approach?

Also, it is understood that the expected legislation will be retrospective, however, we find it difficult to understand why The Pensions Trust are suggesting that it will impact on employers who have withdrawn from the Growth Plan since 1997.

• As GP3 did not exist until 2001 how is this possible?
• Was the Growth Plan not in surplus on an MFR basis prior to September 2005 when the multi-employer debt on withdrawal regulations was changed to the buy-out basis?

A major concern must be that The Pensions Trust are utilising the expected legislation to spread the deficit/additional contributions across more employers. Can The Pensions Trust provide assurance that Growth Plan 4 (“GP4”) is completely segregated and that under no circumstances could the Growth Plan deficit be apportioned to GP4 funds or GP4 funds used to subsidise earlier Growth Plan incarnations?

The other question which raises its head here is does this apply to any other arrangements within The Pensions Trust stable where they have Trustee power to re-apportion liabilities, namely those where defined contribution arrangements have been established under existing defined benefit documentation? I think that organisations have a right to understand this to allow them to consider any potential impact.

The problem now is that participants in this scheme are subject to the worst of all possible worlds – a scheme with assets not keeping pace with inflation which means employers’ risk rising discontentment from their scheme members, an employer requirement to fund a deficit which often relates to a scheme to which they had not made any contributions or to liabilities built up by other participants and an inability to exit the scheme as a result of a change of practice which imposes more significant level of debts.

I understand that there is a Growth Plan Employers Consultative Group (“GPECG”). If the GPECG has not already considered this issue then they really should do so soon and in detail. Participating employers should also consider if they are appropriately represented on the committee of the GPECG, i.e. does the GPECG committee consist mostly of employers with large historical S1 and S2 liabilities (who are likely to benefit from the deficit been spread over GP3) or is there adequate representation from those employers who did not commence participation in the scheme until after October 2001?

In the recent letter The Pensions Trust suggested that employers seek independent advice and supplied some suggestions while helpfully commenting that they weren’t really supplying them – the old ‘think of an elephant’ phrase comes to mind!! They didn’t however suggest that employers should consider legal advice to ensure that there wasn’t an alternative version of the situation which might be contrary to their assessment. I would think that this was essential.

This will undoubtedly be really problematic for many organisations and they need to gain a level of clarity as quickly as possible and preferably using a consistent, independent and cost effective approach.

Things have been moving at such a speed it’s hard to keep up and to pick out the fact from the rhetoric. The week of the strike began with a bit of school yard name calling as trade union Unite issued their “Dossier of hypocrisy” exposing the extent of cabinet minister’s pension entitlements. All that did was make the case that those particular public sector pensions need to be reformed as much as, if not more than, all the rest.

Unite then did its best to drag us back to the seventies and Citizen Smiths’s already outdated class war rhetoric by suggesting that “what they don’t support is a cabinet of millionaires” attacking their members pension benefits. So presumably it is happy with the long list of commentators who aren’t millionaires suggesting it might be a good idea to have a sensible discussion about sustainable pensions in both the public and private sector, which has to include some significant reforms in the public sector? Or possibly not.

On the other side, the Minister for the Cabinet Office, Francis Maude, waded manfully into the debate and helpfully suggested, in the spirit of the whole class war thing, that leading union figures were Trotskyists.

A spokesman for Unite responded by suggesting that his dad was bigger than Frances Maude’s dad. Okay, I made that bit up, but the sad thing is, it was entirely plausible.

Then that slightly overweight financial guru, Jeremy Clarkson pitched in with his considered view that all “the strikers should be shot in front of their families”. Now clearly the only appropriate response to this would have been for Wolfie Smith to have issued a statement on behalf of Unite pointing out that “Come the glorious revolution, Jeremy Clarkson will be first up against the wall, last fag, blindfold. Pop, pop, pop!”

Instead we had Dave Prentis’s calls for his sacking and consideration of legal action.

Sometimes I despair. This is a staggeringly serious issue for our society and indeed western society as a whole. I don’t doubt the passion and genuine concern of the strikers but the level of ignorance on display about pension matters on all sides is genuinely depressing.

So let’s try and bring some sanity to proceedings.

Very helpfully the Association of Consulting Actuaries (“ACA”) joined the debate with a paper entitled “Bridging the gap between private and public pensions.” Michael Johnson a Research Fellow for the Centre for Policy Studies provided some valuable insights in to the sustainability claims of the trade unions. These mostly rest upon a table included on Lord Hutton’s research which show public sector pension costs falling as a percentage of GDP. Johnson’s research highlighted three main flaws in the assessment namely:-

1. The chart assumes that the move from RPI to CPI has been enacted. If this was not to be the case then the costs are much higher and unsustainable. The High Court has just found the switch to CPI to be lawful. The Unions are likely to appeal the High Court judgement but they can’t say that pensions are sustainable because of the switch to CPI and then fight to re-instate unsustainable RPI, because that would be irrational. Well actually they can, and that’s exactly what they are doing.
2. The chart assumes that the public sector workforce will grow by 0.25% a year. How realistic is this given the recent announcements and an expected overall contraction of the sector. Such a reduction would exacerbate the contribution shortfall with fewer contributors but no reduction in pensioners.
3. The chart also assumes that real earnings growth in the public sector will grow at 2% per annum. Again how realistic is this given increasing pressure from emerging markets and the likelihood that our ageing workforce will become less productive. Again this all doesn’t really stack up.

Other statements such as about lower salaries in the public sector than private sector and comparisons between low paid public sector employees and higher paid private sector workers are wildly inaccurate. No mention of public sector ‘fat cats’ or ‘double dipping’ here.

This all highlights the level of ‘spin’ and misrepresentation prevalent in the debate and how much scope there is to mislead people on what is a highly complex and emotive topic. There are serious questions to be asked if leading figures actually understand the detail and its potential impact. Dave Prentis, Unison General Secretary, on the Today Programme with Evan Davis answered all of his questions about unfunded schemes with answers related to funded schemes!!

I’ve seen letters in the papers where public sector workers refer to their pension schemes as “self funding”! Can we all get one of those? Problem solved.

Next Lord Hutton returned to the fray on BBC Radio 4 on the 4th December. “Change is going to be the order of the day.” The recession is much deeper than expected and “That’s going to affect the sustainability of public sector pensions in a negative way. We could be heading for the rocks unless we make adjustment now.” He described the government proposals as “credible” and said “it is hard to imagine a better deal than this. Moreover, a settlement along these lines would bring forward the point where taxpayers can have real confidence that the whole system is on a much stronger footing. These should be really important objectives for all concerned.”

“There is one other simple fact we should not lose sight of. No strike can change the fundamental mathematics of public sector pensions, or somehow reduce the extra costs of rising life expectancy. The only way to do that is via reforming the system. Sooner or later, this nettle must be grasped. What we cannot do is ask the taxpayer to go on meeting an unfair share of the costs.”

Leading employer organisations and social commentators have highlighted concerns that the modified reforms have already gone too far and have already backed tax payers in to a corner should future change be necessary.

The Government has taken steps to protect those close to retirement and low earners and the move to a CARE basis is more equitable across salary ranges and may even result in certain employees benefitting from higher pensions. Ultimately the Unions are right to say that people are expected to work longer, pay more and get less but that is exactly the findings of not only Hutton’s report but a whole list of similar research over the last 10 years plus. You can’t deny the facts. At least what remains is still a pension scheme of a very high quality and the envy of much of the rest of the UK.

Ultimately change is necessary but how do we do we achieve it from this seeming impasse. Attempts to negotiate public sector pension reform in the Isle of Man offered a microcosm for current reforms, with negotiations there dragging on for five years!!

As leading economist John Kenneth Galbraith said – “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.”

I can only hope that the scotoma currently existing begins to clear and we’re not heading for disaster.

Alan Collins features in the Actuarial Post to dispel some myths in “Bribes, Bungs and Balderdash”

With this guidance tPR did more than just mention the elephant in the room, they shouted about it for all to hear and addressed a warning to those who thought that they could continue to ignore that pesky pachyderm. The message was clear: scheme member data needs to be audited and brought up to a prescribed standard before December 2012.

TPR was particularly concerned about the quality of Common Data which includes items such as the members’ names and dates of birth. They stated that Common Data for all current member records created after June 2010 must be 100% complete and 95% complete for all records created prior to this date. Trustees and administrators that fail to get a grip on their data issues by the end of 2012 may face censure.

Spence & Partners had made a pre-emptive strike against poor data with the development of a data audit tool towards the end of 2009. After tPR’s announcement in June last year, updates were made to the audit tool to ensure that it met the criteria that had been laid out in the guidance. Since then, we have audited the Common Data for all the schemes that we administer and have also offered our services to the trustees of schemes outwith our own roster. For most trustees and administrators, an audit report showing that their Common Data is at the desired level of completeness will suffice, but why stop there?

Our experiences over the past 18 months have shown that the power of an in-depth and objective audit tool can transform many of the administration processes that we carry out on a daily basis. No better place has this been demonstrated than with the development of an audit tool tailored to schemes entering the Pension Protection Fund (PPF).

We have taken our already comprehensive data audit tool and enhanced it with a range of tests designed specifically for the processes and data requirements faced by schemes moving through the PPF Assessment Period. We drew upon our extensive knowledge and experience in this area to ensure that the audit tests we developed closely matched the extremely fastidious data requirements of the S143 valuation and the Data Interface Layout (DIL).

The focus that the PPF specific data audit has provided is enormous. The results of the tests quickly and clearly highlight if there are any areas in the data that need to be improved. It can reveal errors in the data that may otherwise have been missed until the PPF provides its DIL feedback. When you consider the complexity and cost involved in producing each DIL, this early insight can prove invaluable.

In recent months the PPF has placed greater importance on commencing the S143 valuation as early as possible in the Assessment Period. By conducting a PPF specific data audit at the start of the Assessment Period, trustees can get an instant overview of the data improvements and timescales that need to be put in place in order to meet the impending valuation requirements, but the use of the audit doesn’t expire here. The audit tests can then be used as a guide to whether the data has reached a point where it is fit for purpose.

Typically, we use the audit to measure the data quality at several points throughout the Assessment Period. Our aim is to reach a 100% pass in both the S143 and DIL test scores prior to completing these processes. Combined with the other technology based solutions that we have implemented in this area, we have been able to reach new levels of excellence in our management and administration of PPF schemes.

The heart of tPR’s motivation for encouraging improved data standards within the pensions industry was to make sure that scheme members receive the benefits that they are entitled to at retirement. The PPF specific data audit has helped us to steer four schemes to transfer over to the PPF this year, with half a dozen more schemes in the pipeline, ensuring that tPR’s aims are realised for thousands more members .

Peter, Graham, Phil and Rachel have just started their arts course at University in London and are sharing a house. Being arts students they have a lot of spare time on their hands. One evening, after a hard day staring out of the window, they’re in the pub (unusual for students I know!!) and Graham mentions he really needs a car for a part-time job he has on the other side of the city, and can’t get there easily using public transport because of the timing but he can’t afford it with all his other bills.

On further discussion they realise that Phil needs a car one out of every three weekends to travel back up to the North of England. Phil claims this is to see his girlfriend but the other three suspect it’s so his mother can do his washing. Rachel needs a car on alternate weekends to go to Kent. Rachel claims this is to spend a couple of passionate nights with her boyfriend, but the others suspect it’s so she can do his washing. Peter needs a car in the evenings to get him to his job but the others suspect it’s so he can do his washing – he works nights at a serviced launderette.

They’re lucky enough to have a driveway at the house they’re renting so parking isn’t an issue. Having thought about this Graham, the one who has a GCSE in maths and nearly did a social sciences course, suggests that they buy a car and split the loan, petrol and insurance costs every month (as they can’t afford to pay it up front). Any value left in the car at the end of the 3 years they can split equally. To a bunch of arts students this seems like a really clever idea and only requires them to divide by four, which should be ok as Rachel has a calculator app on her i-phone. So they agree to go ahead.

They are paying a contribution of £400 per month for the car, £200 for insurance and £200 for fuel, so after consulting Rachel’s i-phone and one false start which saw them accidentally ringing Rachel’s granny in Sevenoaks, they agree to spilt the costs equally £200 each. For the first few months everything goes well and pretty much as agreed with only a few minor niggles.

Phil’s trips up North however begin to become a bit more frequent  as he takes up running and squash thus increasing his laundry requirements, so there is some degree of discontent that he’s getting much more use out of the car (and his mother), and depreciating its value more quickly thereby reducing the amount everyone else will get at the end.

The next thing is that Graham decides University isn’t for him and he’s going to get a full-time job so he won’t need the car as the available options, McDonalds and Tescos, are both within walking distance. This means he can stop paying his 25% share which increases everyone else’s costs. They agree, by which I mean Phil, Rachel and Peter agree, that Graham won’t get any share from the car when it’s ultimately sold despite the agreement they all signed on the back of the phone bill when they set up the arrangement in the first place. This causes a bit of ill will and Graham feels he may have a cause for grievance based on a conversation he had with his shelf stacking supervisor over a hobnob in the storeroom.

Rachel then feels a bit hard done by when she realises that if she’d gone to Sheila’s Wheels her share of the insurance should be cheaper, so she wants to pay a lower amount even if it means having to put up with the odd patronising advert. Tensions begin to rise in the house.

They then discover that there was £2,000 out-standing finance on the car which they’re going to have to pay but how are they going to split this? They can’t find an app for it but suspect that Rachel’s calulator app could probably help if only they knew which of the virtual shiny buttons to push. Rachel’s daddy, the head of a local council, has offered to help out but Rachel doesn’t feel inclined to accept his offer.

This adds to the upset Peter is suffering as a result of struggling with his David Beckham and his Cultural Impact on Western Philosophy module and who’s drinking increases, making his use of the car more infrequent and his continued ability to pay the monthly amounts more challenging. When he does use the car he tends to leave it behind near a pub incurring parking fines which aren’t covered by their agreement and he can’t afford to pay. Gradually the group begin to fall a bit behind with their payments and the out-standing debt remains unresolved.

On one of Phil’s increasingly frequent trips home he has an accident in the car leaving skidmarks in his wake and damaging the front wing of the car. Once washed, his trousers are fine but the car will need some repairs. This causes problems for the other housemates, further increasing discontent. In addition someone mentions to Peter that this will reduce the ultimate sale value of the car which depresses him further increasing his alcohol intake and causing him to scrawl some very derogatory comments about Posh Spice on the wall of the pub’s toilets.

Two years in, the car is falling to pieces, no one is talking to each other and the car’s about to be re-possessed and laundry has fallen down everyone’s priority list with potentially devastating consequences.

And the moral of the story is…..

• Clubbing together might seem like a really good idea but you need to know the risks.
• People are likely to be happy with things at the start or providing they go well.
• People are a lot more prepared to accept some form of averaging when it’s mostly in their favour.
• Levels of discontent tend to rise as costs increase.
• Change is inevitable.
• No matter how good your documentation is it’s unlikely to cover every eventuality.
• Make sure there’s an effective challenge to any decisions before they’re made.
• Not everyone has access to a daddy with deep pockets!!

Does anyone see any familiarities with defined benefit pension schemes here!?!?