All entries for Wednesday 20 June 2018

June 20, 2018

Too much money: It’s time to push back on DB deficits

Writing about web page

Here is the article that I linked to on twitter. It is behind a paywall which means most people could not read it, so I am posting it here. I have included the comments as well because they add something to the argument.

It is interesting in calling for reform of the way pension schemes are managed, especially regarding things like derisking. It is also calling for the DWP to take the matter on board and to act. The author, Robin Ellison, is a very much respected authority on pensions and what he says carries a lot of weight.

Too much money: It’s time to push back on DB deficits by Robin Ellison

For reasons which are probably obvious on the inside but seem impenetrable on the outside, the Pension Protection Fund continues to publish monthly stats on the collective deficits of UK defined benefit plans.

These numbers can fluctuate around £50bn in a month, which suggests that over 60 years any worries about collective UK private sector DB deficits are so volatile as to make publication of the numbers somewhat meaningless.

This over-statisticalisation of the system seems even less useful when looking at other studies which have been published in recent weeks. First Actuarial publish a frequent survey called FAB (First Actuarial Best Estimate Index), which suggests that at the end of April 2018, there was a collective surplus of £308bn and a funding ratio of around 125% on a best estimate basis.

The PPF itself, using a system in the course of refinement, suggests that schemes are collectively funded to around 95% on a s179 basis.

LCP coincidentally published their annual Accounting for Pensions survey in April, which showed that the FTSE 100 companies had a collective surplus (on an IAS 19 basis).

And even the defensive and increasingly aggressive Pensions Regulator has several times argued that the national funding issues for DB schemes were nothing to worry about – saying the system is in good shape.

Return to surpluses is possible

Of course, not much of this gets reported. But UK companies have been pumping funds into schemes over the past 10 years, and as interest rates stutteringly begin to firm, there emerges a non-remote possibility of a return to surpluses.

The question then will be posed by regulators, select committees and financial commentators as to what on earth we were doing to allow such a waste of capital to develop.

These counter-productive funding rules have impacted on British industry.

But not only has it resulted in over-provision; it has been coupled with a destructive ‘defensive investment’ strategy, investing through fixed income – especially index-linked and ordinary gilts – which will inevitably take a hit.

This policy has deprived many members of schemes from enjoying their expected pensions, and shareholders of their proper returns – all because of self-interested and counter-productive regulation and policy.

Time for the IFoA and PLSA to act

It is not too late. We now need to explain rather more forcefully than we have done so far, just what a fantastic job pension scheme trustees and their sponsors have done, despite the regulatory headwinds.

And it is time for (1) the Institute and Faculty of Actuaries to rethink just what is meant by derisking and (2) the PLSA to push back against TPR investment nostrums to try and live in what remains of the 21st century.

Because if we don’t, once the government has found post-Brexit time in its legislative timetable, we might regret not pushing back against the overzealous demands of the white paper as amended by the DWP select committee.

Pauline Armitage19 June 2018 at 13:08
Excellent. No one listened last century so I doubt they'll heed the message now...but then there are 88 years to go so maybe.
Peter Woolsey19 June 2018 at 13:35
At last someone with lengthy experience, and who knows probably more about the issues than anyone else, has bravely come out to challenge the establishment view and TPR on both deficits and funding principles. DB schemes last for generations (if allowed to do so!) and so funding and investment strategies must be based accordingly. De-risking merely demands more and more contributions from sponsors that quite possibly will not be required in the long term. There is potentially the danger that members' prospects of benefits at retirement will actually be harmed because of this. In the past, when investment was mainly in equity type vehicles, surpluses built up which would have served to guard against bad times; but Government got worried about the cost in tax relief and put a ceiling on funding levels. It's not surprising we got to the current position following this because all the good work in the past was undone by poor Government decision-making. It should be remembered that valuations are just a snapshot of a situation at a particular point in time.
Martin Veasey19 June 2018 at 15:04
Unless the covenant is in peril and there is a clear TP deficit, then it isn't a problem that a scheme is underfunded on a risk-free (or close to) basis - the liabilities aren't due today so why should one expect to have all the corresponding assets today? Yes, we should use this as a basis for longer term planning / aspiration but it's not a general emergency for the industry.Media reporting seems to promote the view that this is an immediate solvency metric and a general measure of health in the DB marketplace, both of which thoughts I disagree.

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