The Parable of the Sub

Life Lessons for Corporate Sponsors of DB Pensions

The cost of the outsourced products was ridiculously high.  Bring it all in house and control the development of the products through an off-balance sheet vehicle.  Worked brilliantly and we trusted it to deliver. Within years the products provided a real competitive advantage keeping overall costs well down.  They were reputationally enhancing with employees and with institutional investors.  And the products qualified for tax breaks.  For a generation all went well.  Big benefits at little cost.  

Within a few years at the turn of the century our vehicle became a big problem.  It had to be a sub.  It came on balance sheet and its tax breaks were abolished.  The raw material costs skyrocketed.  And the products in place had much longer repair and maintenance contract costs than anyone had expected.  There were timeless commitments made without proper consideration.  Panic.

Cuts were made wherever possible and alternative products introduced.  The original products were caught by ever tighter Government regulations and admin costs.  Suppliers who had worked happily to create the products now turned tail and wanted to be paid decommissioning costs.  The sub was taking on water and eating cash. We were pumping as fast as possible. It was hated. Anything to get rid ASAP without more damage became the settled Board plan.  Few products said “legacy problem” (not this Board’s fault) so clearly, other than the environmentally contaminated manufacturing sites.  Endgame needed.

Then product managers were excited that new sophisticated treatment fixes had come on the market which neutralised the design flaws.  They were ultra-expensive and crystallised vast liabilities, but they were a stop loss.  Our suppliers recommended them. They said regulators approved of them and everybody in our industries was piling in.

And what was even better was that highly plausible, well-spoken salvage teams came in to buy the sub even if it was at ransom like prices.  But the cost was just out of reach.  Worth saving for harder still.  Then the product fix blew up - it too had such a bad design flaw that even our suppliers were embarrassed for recommending it.  Looked like our sub and many others would sink.  There was a Bank bail out.  We knew we had been done again.  Wrong coordinates on the journey plan.  Rethink.

We realised our suppliers were good friends of the salvage teams who themselves lived in luxury and had plenty of offshore locations where they refurbed subs and made great profits.  Government saw that it was its regulators and rules that had caused a great deal of the problem.  Indeed, the penny dropped that once the initial design flaws had been dealt with, the right approach had been to stand firm and do nothing.  What is more all those competitors who had not overshot on the derisking programmes were well placed now to obtain benefits from an investment bounce back as new improved modernised versions of the products became available.  
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The circle of life. Once again, we decided to take pension provision away from the clutches of over mighty life insurers and look at our sub’s products and prospects as we would any other subsidiary.  And the good news is that both our former and our current employees, and our shareholders will benefit.  The original over-exuberance gave rise to many traumatic years but before all the value was squandered the Board found a way to Sail On 4 Good.  We love our sub again.  It's our ESG worked example.  It had just been misunderstood.  Life lessons were learnt.  The parable of the sub.