Spot the Difference

11th November, 2010

  • A man walks into a betting shop

    He places a £10 stake on a 7-horse accumulator. To win the bet, all 7 horses need to win their races. One by one, they keep winning and after 6 races the accumulator stands at £800,000.

    There’s just one to go and the odds are 4-1. He’s now sitting at home in front of the TV, a bag of nerves, knowing that within half an hour he will be collecting a cool £4m or nothing at all.

    Back at the betting shop, the manager has filed the bet in the no-hopers pile and is blissfully unaware of what’s going on.

    Half an hour later and, would you believe it, the horse has won but there’s a twist – the maximum permitted payout is only £1m. After much discussion and a failed legal challenge, the man is richer by one million but feels like he has lost three (not to mention the legal fees). In effect, he had placed a final bet that only had a 20% chance of paying out £200,000 but had an 80% chance of costing him £800,000.

    While he lay on the beach the following week sipping his favourite cocktail, he reflected on two things he had learnt:

    1) Check the rules – if the limit is £1m, only do accumulators to that amount.
    2) Know your position – before the last race, he could have laid the bet off, whether there was a limit or not.

    A trustee walks into a trustee meeting

    The chairman points out that the scheme has been running for exactly 60 years today and the recovery plan has just 10 more years to run.

    When the valuation was last done in 2008, the funding level on an ongoing basis was 80% with a deficit of £2m. The scheme is invested in equities and closed to accrual so if the recovery plan is to be believed and  the employer keeps making the contributions then, provided that equities achieve 7%pa, the trustees can begin to consider securing the members’ benefits with a Life Company in 2020.

    The trustees agree to meet again in 6 months. As they settle in to their respective day jobs, they’re not a bag of nerves.

    Back at the stock exchange, equities have been all over the place and currently stand 40% higher than at the date of the last valuation. Over at the Pensions Regulator, guidance and rulings have been coming thick and fast.

    Ten years later and, would you believe it…..actually this time I’ll leave the outcome blank for you to decide. There are just too many moving parts and, let’s be honest, anything is possible these days, especially over a 10 year period.

    While he lay on the beach, ten years and a week later, the trustee reflected on two things he had learnt:

    1) Keep checking the rules and regulations – they’re complex and they keep changing.
    2) Know your position – if only he and his fellow trustees had monitored things more closely, they’d have spotted opportunities and made different decisions along the way.

    Did you spot the difference?

    That’s right, the man in the betting shop is only responsible and personally liable for his own money. Let’s hope it all turns out OK for the trustee.

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