Hilary Salt gets a touch of the William Blakes!

Arise you actuaries from your slumber (guest blog from Hilary Salt)


I’ve found the last few weeks exhilarating. For the first time in perhaps 30 years, there’s been a real political debate in Britain. A debate where it clearly mattered which side you were on, a debate that split families, friends and communities on and off line – my own included – and a ballot where your vote really counted. The referendum concluding with a Brexit decision has not put an end to the lively political debate which is now focusing on our commitment to democracy.

So what has this got to do with pensions? We know that times of political excitement create a backdrop against which the arts flourish – think Shakespeare, Beethoven and Goya. And strangely it seems that today’s re-awakening is creating an atmosphere where many of the criticisms I have made of actuarial advice are being debated more widely.

To recap, I have previously argued in this column that actuaries mechanistically using the “gilts plus” methodology beloved by the Pensions Regulator have tended to introduce unnecessary prudence into actuarial bases.

Worse still, many schemes have then allowed this actuarial model to drive their investment strategy – investing more in bonds to reduce volatility against this subjective measure – so the metaphorical tail of the actuarial model is allowed to wag the dog of a sensible long term investment strategy.

Unsurprisingly, locking in to the guaranteed negative real rates of returns on gilts in today’s markets has a real effect in increasing the cost of benefits. For many schemes still open to accrual, the effect of this on future service contribution rates is the latest headache.

Past service deficits might be challenging but have often been broadly matched or hedged out so are reasonably manageable. But costing ongoing benefits on the assumption that assets will now and for ever into the future be invested largely in bonds yielding close to zero makes continuing accrual unaffordable.

There are of course other ways. The legislation on scheme funding is relatively liberal and allows the funding of schemes to be assessed using either or both “the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns, and the market redemption yields on government or other high-quality bonds”.

Legislation does not mention employer covenant. Of course, it is important that in any funding approach, we are adequately prudent and do not overpromise member benefits. But using prudent expected rates of return that don’t peg liability values to falling gilt yields is an entirely appropriate approach.

I’ve been saying this for a long time – usually in scenarios supporting member representatives whose employers are looking to abandon high quality, efficient, collective defined benefit schemes in favour of poor quality, inefficient defined contribution arrangements. And that’s been a lonely place to be.

But suddenly, a little crowd is gathering. Professional Pensions reported last week that Ros Altmann (the pensions minister at the time of writing) “argued not all trustee boards are using the flexibilities available to them. These include….looking at bespoke actuarial assumptions”. And in its call for evidence the PLSA is inviting comments on funding.

Meanwhile the Joint Forum on Actuarial Regulation has issued a paper on Group Think. And interestingly, the latest headlines on current deficit levels calculated on mechanistic bases – showing a 30% month on month increase in deficits to £384bn when nothing much has changed – are leading even the most committed mark-to-gilt-marketeers to ask whether what we are measuring is sensible.

I don’t want to get over-optimistic. Conservative forces are often especially strong in revolutionary times – think of Blake’s romantic re-action to the industrial revolution. But I do want to welcome and nurture the signs of change.

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Hilary Salt is founder of First Actuarial


This article first appeared in Professional Pensions

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Hilary Salt gets a touch of the William Blakes!

  1. George Kirrin says:

    Hilary quotes the flexibility contained in the Occupational Pension Schemes (Scheme Funding) Regulations 2005, which came in turn almost word-for-word from the EU’s IORP Directive of 2003.

    The EU’s IORP Directive II (from 2017) adds the following further options in (ii) below to gilts-marked-to-market when using market interest rates as the basis for discounting future liabilties:

    “the maximum rates of interest used shall be chosen prudently and determined in accordance with any relevant rules of the home Member State. These prudent rates of interest shall be determined by taking into account:
    (i) the yield on the corresponding assets held by the IORP and the projected future investment returns;
    (ii) the market yields of high-quality bonds, government bonds, European Stability Mechanism (ESM) bonds, European Investment Bank (EIB) bonds or European Financial Stability Facility (EFSF) bonds, or;
    (iia) a combination of points (i) and (ii);”

  2. Pingback: The greener shade of vague: where are defined benefit pensions headed?

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