Why DB pension promises may need a credit rating.

credit granny

How do you rate the creditworthiness of your scheme’s funding?

Trustees of defined benefit schemes now have to properly assess the employer’s ability (and willingness) to fund the promises made to the members of the scheme. The assessment helps them in negotiations with the employer on funding issues and (typically) the recovery plan put into place when there is not deemed to be enough money in the DB pot to meet the promises made to all the members.

This assessment can be expensive to get,  the costs are passed on to an employer but the information stays with the trustees.

Much of the information in the assessment may be sensitive as a good assessment probes into the risks the employer is running and the challenges ahead.

Understandably, employers who may already  be aggrieved by having to pay to expose their dirty linen to the trustees, may be even more reluctant to share this information with pension scheme members and their financial advisers.

It may be in the employer’s interests to expose its dirty linen.

But it may be in their best interests to allow members of their defined benefit scheme, paradoxically, especially when the assessment is that the employer’s covenant is weak

Let me explain;

A weak covenant means that the employer may have trouble paying its pension promise to the fund, unless the fund gets lucky on investments or the outlook for interest rates improves (the measure that governs the measurement of liabilities) it may be that the pension scheme may stay underfunded and one day go into the pension protection fund (PPF)

For many people, the  PPF may not be that bad news, people with small benefits may not lose out; but members with bigger benefits stand to see their pension promise clipped by as much as a quarter if their pension scheme has to be bailed out.

If people knew that there was a significant risk of losing part of their pension, they might be more inclined to take a transfer value, even were it to be a tad stingey,

And this might suit the employer very well, since the kind of people who bother to look into these things with their advisers are the kind of people who have sizeable chunks of a DB scheme’s liabilities.

The transfer value takes these liabilities off the books, often at considerably less cost than the book value of the member’s benefits.

To understand this last bit, you will have to investigate the arcane valuation system of a pension scheme which can be carried out on a number of basis. As all the basis’ produce different results, a trustee can use one valuation basis to calculate transfer values and another to value the members benefits when asking for funds from the employer,

I am not an actuary (does nobody listen?) and I don’t want to go into why all this is, but let us just say that it may be in both the member’s interests and the interest of the Pension Scheme, that the member goes his or her separate way.

So airing your dirty laundry to your staff might just make sense. It may be embarrassing and it may not be something you want suppliers and customers to know, but sometimes it pays to be honest and transparent.


And no employee should be anything but grateful for this information.

I cannot think of any other asset of comparable value to a pension promise that we know so little about. Imagine owning a corporate bond and not being offered a credit rating, or buying a house and not being able to see a structural survey.

A pension promise is only as good as the promise that backs it up, and if the employer’s covenant is junk, then the Transfer value may be very good value indeed.

Working out a credit score is hard , but understanding it is easy.


credit score



How Alan Rubenstein can help!

In his article in the Telegraph over the weekend which you can read via this link, Alan Rubenstein, the boss at the PPF, suggests that members of pension funds should be asking the difficult questions about the quality of the support employers can give to the pension promised.

For the PPF, who want to see greater solvency in DB pension schemes, the de-risking of those schemes by members voluntarily taking transfer values, is a good thing. For trustees, it improves security for the remaining members. For employers it gives welcome relief from pension pressure on the balance sheet.

For members the availability of a covenant assessment and/or a PPF rating is wothwhile information, with the assistance of a trained adviser (or a personal understanding of credit), that information can be turned to  knowledge.

Perhaps DB members should be asking Alan a question.

“If DB scheme’s are risk-assessed by the PPF, why doesn’t the PPF make those ratings available to scheme members?”

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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