Some weeks ago , Anthony Hilton, finance writer for the Evening Standard, used his common sense to question whether the deficit emerging at the Daily Mail Pension Trust (DMGT) was real.
The pensioners he represented did not seem any more of a liability than they had been three months before, they drew the same pension and drank the same beer. Why then were he and fellow trustees, being told they had become a whole lot more expensive.
In truth they were the same people, drawing the same pensions, but because the notional cost of buying gilts to match the expense of paying their pension had increased, the capacity of his pension fund to meet this demand had diminished.
Anthony saw no logic in this. He and his trustees didn’t want to buy gilts and didn’t want to measure their deficit using assets which were patently not fit for purpose.
Anthony’s common sense view is not one shared by the Pensions Regulator which wants schemes to be invested in and value liabilities in gilts . But this approach comes at great expense to the employer, indeed at the risk of the jobs of journalists and paper distributors, the organisers of the Ideal Home exhibition and all the others who work as part of Anthony’s enterprise.
Infact, demanding that liabilities be valued with reference to gilts is like setting the average lap-time for Silverstone in a tractor.
So the good people at First Actuarial decided to re-cut the numbers and look at the deficits of the occupational DB schemes in the Pension Protection Fund’s 7800 index , using more realistic investment returns.
It shows that if we allowed the trustees of our defined benefit pension funds to run their schemes using common sense, rather than the twisted logic of mark to market accounting, we could all calm down and relax. Pensions were supposed to bring comfort not angst!
Here’s what they have to say, This is the first of a series of “FABI” reports, they’ll be producing to counter the professional doom-mongers making such hard work of pensions.
UK defined benefit (“DB”) pension funds probably have more than enough money to pay all their pensions due.
Today, First Actuarial launched its First Actuarial Best estimate Index (or “FAB Index” for short). The FAB Index shows the financial position of the UK’s 6,000 DB pension funds on a long-term basis allowing for realistic future investment returns.
At the moment, using realistic future investment returns, UK DB pension funds have never been better funded and have an aggregate surplus of around £358bn and an overall funding level of 133%.
The chart below shows the FAB Index plotted alongside the PPF 7800 Index, an index calculated by the Pension Protection Fund (“PPF”) to determine the aggregate level of Section 179 underfunding across all pension schemes in the UK eligible for PPF compensation in the event of employer insolvency.
As at 30 September 2016, the asset, liability, surplus/deficit and funding ratio of the PPF 7800 Index and the FAB Index were as follows:
|10th September 2016||Assets||Liabilities||Surplus/(Deficit)||Funding Ratio|
|PPF 7800 Index||£1,450bn||£1,869bn||(£419bn)||78%|
Rob Hammond, Partner at First Actuarial said:
“Historical low gilt yields have led to historical reported deficit levels of DB pension funds. But, a reduction in gilt yields doesn’t necessarily translate into an increase in pension fund deficits, particularly if that pension fund doesn’t invest solely in gilts.
“The FAB Index is an attempt to provide a more realistic measure of the value of pension fund liabilities in an attempt to combat what we see as scaremongering within the pension industry and to help trustees better understand the true value of DB pension fund liabilities.
“Whilst we recognise that pension funds should be funded prudently, we challenge the traditional ‘gilts plus’ approach to valuing DB pension funds. This starts from a position that arguably bears no relation to the likely long-term cost of paying the pensions. Instead we would encourage trustees to consider a ‘best-estimate minus’ approach so that they can start from the expected return on the assets they actually hold and deduct an explicit margin for prudence.”
The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension funds. all the assumptions for the blue lines are to be found in this blog.