A recent high court ruling stopped the trustees of the Ilford Imaging pension scheme protecting their best pensioned members by purchasing them guaranteed annuities- an expensive luxury. The Court concluded that trustees could not indulge in what is known as moral hazard -“heads we win-tails we don’t lose” or more properly-‘heads we win, tails the PPF picks up the tab”.
The PPF is a Government organised safety net which will, should it fail, need the public purse to put things right.
Most of what has been written on this has concentrated on the employer’s and trustee’s interest. This article concentrates on the interests of two other stakeholders- Joe the tax-payer and Joe the member (recently deferred).
Joe the tax-payer is already underwriting a large portion of the UK’s pension debt and has every reason to be concerned about picking up debts from schemes such as Ilford’s. Joe the member is the vulnerable beneficiary of an income in retirement promised by his company (with varying degrees of certainty).
A few years ago, the States of Jersey entered into a Faustian pact with its pension scheme. The Trustees released their sponsor, the Jersey tax-payer, from an obligation to guarantee pensions: in return they got a guaranteed contribution to the scheme of 16% of active member salaries for 82 years. While the Trustees continue to pay pensions at the old defined benefit rates, benefits will be cut, as and when the money starts to run out. According to the actuary- everything will be ok in 82 years time.
Once the Trustees had concluded the pact, they upped the equity exposure of the funds arguing that they now had DC liabilities and could run a DC type strategy relying on the long-term equity premium. The Trustees considered 82 years would give shares a reasonable chance to prove themselves.
There is a place for such carefree enthusiasm and that place is Jersey.
The interests of Joe the tax-payer and Joe the member are, in Jersey, well aligned. Most tax payers are current or deferred members of the scheme and if there is a risk transfer , it is an inter-generational transfer to the Jersey citizens of the 22nd century.
The interest of Joe – the member of a UK regulated company pension scheme – is not aligned to those of the PPF (which represents a much larger population of Joes) . It is still less aligned with Joe the tax-payer who is extremely unlikely to have any interest in Joe the member’s plight.
And the obligations on the management of a private company to re-pay its pension debt is much more urgent. A 5-7 year recovery plan is in line with the average Director’s time in office, there is no 82 year End-Game for him.
There is neither the time, nor the money, nor the public inclination to let trustees play games with the funds of their membership.
The Ilford ruling will need trustees to pay more attention to getting themselves out of trouble rather than relying on the Government lifeboat. Trustees will have to concentrate on sound investment strategies and there will be no scope for the practice of securing tip-top pensions at the expense of Joe the tax-payer.
The Ilford ruling will protect Joe the tax-payer from reckless trustees and it will let Joe the member feel a little more comfortable about the future of his retirement income . It should encourage the trustees to pay more attention to risk and it will motivate employers to pay more attention to the risks the trustees are taking.
Who won? The common man won. The Court delivered a sensible ruling.
Common sense won.