Open Dissent (12 page)

One can be sure that the same level of leniency is not available under law to unfortunate investors who go bankrupt. In the event of defaults in business, consideration must be given to the bankruptcy laws in Ireland. At the moment, not only is the stigma attached to bankruptcy severe, but the punishment of a twelve-year recovery period is excessive in respect to default. We must align ourselves to whatever best practice is in Europe; it might not be more difficult than examining the bankruptcy laws in the UK. In a nutshell, the term that a bankrupt serves in the UK is one year before they can go back into business and have their credit record cleared. A term of twelve years exists for bankrupts here. It appears that the laws in Ireland view a bankrupt in line with a criminal. If people fail in business and in turn fail to repay their creditors, should they be burdened with such a horrendous stigma from which they are unlikely to ever recover? The penalty of bankruptcy is out of proportion to the damage. Will a variation of the action in the Caroline McCann case be witnessed over the next year or so to prevent the stigma of bankruptcy condemning some to twelve years of exclusion from business?

Should debtors get a life sentence for misfortune, greed or poor judgment? There are endless cases of negative equity and these are visible in all sectors of the community. Is there any room in the recovery equation for an amnesty or forgiveness for part of the outstanding debt? Should a generation be relegated to a life of penury and insecurity? Lenience on the part of the creditors will possibly hinder the efforts of the regulators to have the banks recapitalised at levels consistent with best practice.

It is in the interests of the state that measures are taken to alleviate some of the stresses and burdens that are weighing down the families whose biggest crime was that they wanted to be wealthy and secure. Homeownership needs to be facilitated. The law should be changed so that the home cannot be repossessed in the event of a failure to pay debts in another area. The home is the cornerstone of society and it should be protected from the greed, weakness or foolishness of borrowers and lenders alike.

The owners of the banks come in various guises, from major institutional players to retail investors, to those whose few hundred shares mean as much or more to them as the big institutional holdings of fund managers. A great deal of trust and loyalty has been lost among this constituent. The financial losses have accumulated for each category of investor and many are left wondering if they are ever going to get anything back on the shares they hold. Will the value of the shares go to zero through nationalisation or, by some great financial miracle, will they recover to €2, €5 or €10?

It has to be understood that the major shareholders in the Irish banks who were badly burnt during this crisis are unlikely ever to reinvest in the old banks. This unfortunately arises as the major investors will put their surplus funds where they deem the opportunities to be greater and the risk a lot lower. These people never saw the banks from the perspective of networks and employees but in terms of financial investments that would generate capital gains and dividends. Often these investors would look at the annual reports and would value the performance of the Irish institutions compared to the other best-performing banks in Europe. Our banks had something more than just a domestic network: they had created a financial legacy from hundreds of years of banking practice. Good banking practice. But over time they have matured into international banks that have grown organically or acquired new businesses in wholesale banking, capital markets, fund management and insurance. The investors were able to put values on the diversified sources of cash flows, which meant, from an analyst's perspective, that, even if one activity failed, three or four others would perform profitably. On those occasions when all cylinders were working in unison, the profits were substantial and the return on equity and dividends was praiseworthy.

The big investors take what might be described as a helicopter view of our banks from the perspective of investment. From that same vantage point today, looking down on the remains of these once venerable institutions, they see little life in the future unless some very hard decisions
are taken about the management and strategy going forward. This is now in the hands of the Government and the EU.

While there is no doubt that the trust and confidence of shareholders and investors in the banks have been seriously shaken, the relationship between the banks' customers and local branches, the flagships of our financial infrastructure in every city, town and village in the country, have also taken a hard knock. This situation is dangerous for the whole banking system and the local branches need to work to re-establish the trust that once was inviolable.

In the middle of this financial crisis we appear to have lost sight of the ‘old' shareholders. In the Irish banking context these shareholders were either domestic or international and were made up of private and institutional investors. At least that was until the Government was forced to step in, initially becoming a preference shareholder and subsequently, through conversion, becoming an ordinary shareholder. The market capitalisation of the banks was in aggregate close to €60 billion before the crisis occurred. More than 150,000 individual shareholders held billions between them, either directly or through funds. The value of the combined shareholdings in the banks today is less than 5 per cent of what they were at the peak.
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We can often forget that these 150,000 were family members, businessmen, farmers, professionals and pensioners. As the market value of shares started to evaporate, tens of thousands of individuals from all walks of life were hurt
financially. The nest eggs that had been put aside for the rainy day had all but disappeared. Education funds for children, fees for nursing homes, cash for the new car or holidays, or just savings for a rainy day were no longer within easy reach. Worse still, the insecurity caused by this crisis has knocked the confidence out of this key sector of our community. Savers who were unlikely to be a burden on the state are now thrust into the social welfare system that they prided themselves on being able to avoid through good planning. Is consideration given to this cadre of savers in the context of them losing more than money? They have no reason to question their own self-respect or judgment; they did their piece for society and the system has let them down.

In many ways losing one's security brings on stress for the ordinary family that may manifest itself in frightening ways. This brings up the questions of the size of the holes in the pension funds and what can be done to fill them. Many of the Irish pension funds would have held substantial amounts in Irish equities. During the past three years some 70 per cent of the market value was written off. The Irish stock market index has fallen from a peak of 10,400 to below 2,700 over the past two-and-a-half years.
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Over recent years, a number of Irish corporations have gone to the wall, leaving their pension schemes underfunded. The trustees who were responsible for the investment of the pension funds in corporations were charged with the responsibility of taking an arm's length approach to ensure no conflicts of interest occurred that
would jeopardise their predetermined investment strategy. There are many categories of funds, ranging from personal to company to institutionalised funds. Simple investment strategies were often developed where the pension funds had overriding principles of security before growth; if growth was essential then the preferred risk profile of the investment had to be stated. Speculative funds in pension funds generally represented a very small percentage of the total to be invested. Entertaining speculative opportunities, however small, tended to be under the condition that there would be only modest losses in the event of a failure.

One of the single biggest problems for Irish pension funds is the conflict that can arise when the trustees are encouraged to invest some percentage of their funds in their employer's company. The support given to one's company through investment in some part of the pension fund is laudable and, in good times, rewarding for all. Having influence in the company as a shareholder and not just as an employee allows for greater commitment to the vision of the organisation. Whatever percentage is deemed appropriate from the perspective of the maximum exposure by the company's pension fund in the company, be it 1 per cent to perhaps a maximum of 10 per cent, should be predetermined. The benefits of so investing must be analysed and judged in the context of a possible major downturn in the economy or the company. On those occasions when the trustees meet with the owners or senior management of the company, employees may be faced with the dilemma that more money out of the staff pension
fund is required to be invested in the company. The conflict is terrible and the decision to invest more of the employees' pensions into their employer's business has to be taken very seriously. Depending on the make-up of the trustees, whether they include employees, pensioners, auditors, the company secretary or perhaps some senior executive of the company, the conflict begins to simmer. If further pension funds are required to be invested in the company, the purpose for the additional resources must be explained clearly to employees. The explanation may well be couched in positive terms, reflecting the growth of the company; on the other hand, there may be veiled threats as to potential job losses if the investment does not take place.

Trustees will meet and discuss at length the pros and cons of such investment opportunities but could feel constrained in speaking their minds for fear of alienating the other trustees or, God forbid, their boss on the committee with them. This suppression of different opinions is at the heart of the failure of decision making at committee level. The trade-offs are real – an employee might decide to invest to help to save the company – but eaten bread can be soon forgotten. The consequences of allowing investment levels to rise to excessive heights in this context put the income of existing pensioners and future pensioners at risk. The price of not speaking out is enormous, not just in financial terms but in terms of future human misery. Before companies go to the brink of bankruptcy employees should clearly understand the nature of their exposure. In fact, demands for additional top-ups from the pension fund, if
the amount in question is over a certain agreed limit, should automatically lead to a meeting of all associated pensioners.

As banks and other companies seek ways to recapitalise their organisations during these difficult times, there is one stage of this process that must be carried out by the regulators and the pension trustees. In entities where employees are fortunate enough to have a defined benefit plan but unfortunate in that they are reminded on a regular basis of the size of the pension deficit, it is essential that the trustees as shareholders, employees and future pensioners have an active dialogue with management on recapitalisation, in particular recapitalisation that comes from the sale of key corporate assets. These key assets, by any evaluation, would have been major contributors to the cash flow of the company and in turn would be viewed as potential ways to fill the pension deficit over the coming years. In their absence, what is going to replace these streams of profits? If there is no guaranteed future income stream to be derived then some portion from the proceeds of the sale of the assets should be allocated to the pension fund. The amount to be allocated would be easily calculated as a percentage of the sale that would equate to an appropriate reduction in the pension deficit. The principle here is that those assets that generate the cash flows currently or in the future cannot just be absorbed by the system to allow those who oversaw the destruction of the capital to be given an opportunity to repeat their mistakes. If assets have to be sold in a recapitalisation process, the conservative view
would be to reduce or eliminate the pension deficit before any proceeds from the sale would be used elsewhere. Employees are not just workers, working capital or unnecessary cost centres, they are the lifeblood of companies who invest more than money into their careers. The protection of the employee has to be paramount in any investment strategy being undertaken.

As the Government contemplates nationalising the banks, they are faced with the potential liability of the pension shortfalls in the banks' balance sheets. If recovery comes, as all of us wish, then we may ask what percentage of the future profits of the banks must be allocated to pension funds. That being said, what effect would action of this nature have on the overall performance of companies and their ability to attract new investors? Fundamentally, if the banks recover, will they be able to generate sufficient profits if they are forced to sell their most profitable assets at this time to generate enough capital to meet the Regulator's requirements?

Whether people benefit from personal pensions or major institutional schemes that have taken decades to build, all pensioners are viewed as either long-term investors or traders. For most people, the strategy determined to provide an annuity will take into account many, many factors. The sophistication is extraordinary. It deserves to be as it provides security for the investor for the remainder of their days. On the other hand, an individual who is administering his own fund might be lucky enough to have a good financial advisor but in many instances may only be
armed with some financial periodicals and the daily business section of the newspaper. The different skills of investors in managing money are evident in terms of performance and results. But the question remains as to whether we should have an investing mentality or a trading one when it comes to our pension funds. It is fair to say that few people have the training or experience to be traders. In fact, most people do not have the time to be active in the markets, as this concept of trading would imply. However, it is essential for people to stay on top of their pension performance and have a Plan B in the event they observe a potential erosion in the value of their investments.