Let’s talk about risk – trustees, let’s talk about you and me..


Talk Risk

The Telegraph has published an excellent article on the risks of you not getting your full pension from a defined benefit pension scheme. In it, Alan Rubenstein who is in charge of the Government Lifeboat for schemes that go bust (the Pension Protection Fund) says

“It is misleading to allow people to expect promised pensions when in fact there is only money enough to pay about 60 per cent of those pensions [should they be cashed in today] and where nothing is being done about the shortfall.”

He is absolutely right, there are a small number of these schemes that are falling further and further behind the run-rate. Some will have to score at the equivalent of ten an over and some of the employers have too many wickets down. Unless there is a miracle partnership from numbers 10 and 11, many schemes will be all out.

deficit levels

Today DB pension schemes can only afford to pay on average 80% of the pension


The situation looks particularly dire at this moment. We had expected to see an interest rate rise (at least on the horizon) but instead the long term prospect for rates remains super-low, while this is good news for borrowers, it is bad news for savers. Annuity rates remain super-low and the cost of paying pensions super-high.

Put this in a cocktail shaker with sluggish stock-markets and you get a very hefty annual bill presented by the actuary to meet the shortfall between what he or she estimates is needed to pay all future pensions and what is in the pot.

This bill is simply too much for some organisations. The prospects of these bills for years to come (known as the recovery plan) proves too much for those who finance these companies and the employer is forced into administration.

coins falling

The Pension Scheme is pre-packed and enters the PPF after a bit of too-ing and fro-ing.

Those most vulnerable, typically the pensioners with no capacity to get income elsewhere get pensions in full, those with bigger benefits awaiting payment are likely to take a pension cut. In the end the PPF bails out the basket cases and were that to happen too often, the tax-payer would bail out the PPF.


The PPF is a lifeboat not a cruise liner


This is all very good and  a whole lot better than the bad old days where schemes that went bust (like Allied Steel and Wire) paid nothing to people who most needed every penny they were due. It’s thanks to people like Andy Young @andyjags who designed the thing, Steve Webb who oversees it and Alan Rubenstein who manages the thing, that the PPF has done its job (in very difficult circumstances).

This is not alarmist- this is responsible Government

Alan Rubenstein is being accused of being alarmist- but I think he is being extremely responsible. He is drawing attention to an unpleasant fact, that not only are some schemes technically bust, but many people are making their plans  around these schemes paying out in full.

Employers who are failing to put in place proper recovery plans or who are failing to meet the payment schedules need to be having a conversation with staff which talks about some harsh but unpleasant choices. These might include

  • Choose whether you want a pay cut now or for your entire retirement.
  • Choose whether you want this company to stay in business or your pension promise to remain intact
  • Choose whether you want to be part of the problem or a part of the solution.

A couple of years ago, some very able people had these conversations with the members of the Kodak pension scheme. Kodak was bust and so was the pension scheme. In the end Kodak continued to trade but the company became the property of the pension scheme. Kodak employees are working for their pensioners and those who are retiring today will have their younger colleagues working for them.

There are no silver bullets that shouldn’t make people helpless

I am quoted in the article as saying there is no silver bullet that is going to sort this problem out. Putting the pension fund under the mattress (and into cash) will drive up the cost of the Recovery Plan, investing in risky assets is playing double or quits.

talk risk 2

I wanted to agree with Alan Rubenstein that we cannot be complacent about these pension deficits.

If I’d had more than 5 seconds preparation for my call I would have made asked the Telegraph to consider what people in defined benefit schemes (whether they still work for the employer or not) – can do.

( Note to Telegraph -I’m no actuary- working for First Actuarial doesn’t make me an actuary, working as the convent handyman wouldn’t make me a nun).

So what can people who have rights in a pension scheme do?

  1. Find out who the trustees of the scheme are by contacting the employer.
  2. Contact the Chair and suggest that the trustees make a statement to members about the funding position of the scheme
  3. If you are not comfortable with that statement ask that a meeting for those to be impacted be arranged with members of the scheme.
  4. If necessary, get involved, this may not just be the employer’s problem
  5. Be tolerant, however worried you may be, throwing rocks is not going to make this better,

Well done to Alan Rubenstein for saying it like it is, well done to the Telegraph for publishing. This should not be a debate about whether people should take transfers from DB schemes (as rats from sinking ships). It should be a debate about risk sharing and how fair solutions can be found to intractable problems.

If the run rate is 10 an over and we have 9 wickets down even the rain and  Duckworth Lewis won’t save you! The best you can do is to ensure that the impact of the defeat is minimised and that the team live to fight another day.

With Pension Freedoms around the corner, Trustees cannot duck this conversation. Members cannot take exercise freedoms on pensions in payment so the decision to draw a DB pension is as irreversible as buying an annuity. Trustees need to make their members knowledgeable about their options.

talk risk 3



As a postscript, I notice that Alan has published some clarifications which are posted on Jo Cumbo’s twitter time line.







About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Let’s talk about risk – trustees, let’s talk about you and me..

  1. Terence P. O'Halloran says:

    Surely the ‘shortfalls’ have nothing to do with Gordon Brown’s initiative in 2003 to force all pension and life policy guarantees to be ‘secured’ by government fixed interest stock? Who could possibly have been that naive at the bottom of the stock market. Standard Life converted 7.2 Bn, was it, over a period of 8 months?

  2. Rita Powell says:

    I agree Henry – it is a topic that needs to be discussed openly – and carefully when communciatingn with members. The difficulty is that many of the liabilities are now deferred and have had no contact with the employer for many years.

    My other concern is that so many recovery plans focus on Technical Provisions that fall way short of the true cost of providing the promised benefits. Yes it would be great if gilt yields reverted to the norm of several years ago- but how long can we wait? And If it happens then some companies who have locked in at low rates over the past few years may have paid too much. But as a Trustee I know where I’d rather be.

    Many schemes rather blandly tell members that they keep an eye on the employer covenant; should they disclose how they rate it? If TPR assesses a covenant as weak or tending to weak, do the members have a right to know that? It is they who are running the real risk, (the Trustees just do it on their behalf).

  3. Jonathan Lawlor says:

    …and the situation is a litte worse than that shown in the chart. This is because it includes both schemes in deficit and those in surplus. Excluding the schemes in surplus, those in deficit are only 72% funded – unless of course we find a way to transfer money from schemes in surplus. (http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/PPF_7800_underlying_data.pdf)

    I wonder if Trustees are the correct people to inform members of all the options. Trustees are there to administer the rules of the plan and pay benefits. Should they ‘advise’ a member to transfer out, and the member ends up with a worse pension, who will be liable. All to often, by giving people a choice, we allow them to select (unintentionally) the downside.

    Also if the Regulator/Trustees inform members that the Employer is poorly covenanted, is there not a risk of legal action? Or business moving away from the Employer thereby exacerbating the trade position of the Employer and Employees, but also making the funding position worse?

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