News that ballooning pension deficits are hitting profits and leading to hiring freezes is both unwelcome and unacceptable. Pension schemes should be benefiting UK businesses, enabling them to retire those becoming less productive and hire the best new talent.
But that the CIPD has found that 60% of more than 1000 large British employers reported having to pay more into their pension scheme to meet inflated scheme liabilities. Liability inflation was created by low interest rates, a by-product of Quantitative Easing. The report also found that 1 in 10- businesses had dealt with increased pension costs since 2013 by restricting pay rises with a further 10% saying that pensions had led to a reduction in profits. 2% even claimed to have reduced their dividends (clearly the shareholder has been relatively well protected as 6 times that number of employers reacted to hire pension costs by reducing future pension benefits.
The survey was carried out in September. The feedback from British business is at odds with the Bank of England, that claimed QE had had little impact. Looking at the granularity of the survey , it is clear that it is the larger employers with the greatest pension liabilities which have been hit hardest. 17% of businesses with 2-5,000 employer had seen pension funds reduce profits and more than a third of the largest employers (20,000+ employees) had cut pension benefits for existing staff.
It’s great that the Chartered Institute of Personnel Development has done this work but I take issue with the finger being pointed at the Bank of England. Ros Altmann is reported in the Financial Times as saying
“Anyone involved in pensions who is speaking to employers and trustees already knows that QE is having a damaging impact. I hope the Bank of England will finally wake up to the damage its policy of artificially depressing long rates is having on parts of corporate UK”.
The pension industry has dug a hole for its pension funds and is now asking them to lie down and be buried- at great expense to employers. But as I said at the top of this blog, it is now when these funds are reaching full output , delivering pensions to the baby-boomers. Now is the time when we should be congratulating previous generations of management for deferring profits to fund for the pensions being paid today.
Why make “pensions” into a business pariah?
Why blame a short-term monetary measure for an artificial inflation of pension liabilities?
Most of all, why allow artificial manipulation of interest rates to drive not just pension deficit funding , but the management of the companies that need to fund those deficits?
The survey (and Ros Altmann) accepts the causal chain; low interest rates – higher pension deficits – lower profits – less jobs.
But we don’t!
The pension industry has been looking at pensions as “problems” for too long. If you decide to adopt a positive mental attitude (what my friend Kevin Wesbroom refers to as “la-la thinking” (thanks Kev), then you get to see a different picture. The First Actuarial approach to pension liabilities is to consider pension funding as part of Britain’s “Business as Usual” and not as some kind of “school fees” liability designed to end as soon as the little mites (sorry pensioner liabilities) can be kicked off the corporate balance sheet.
We don’t see DB pensions as bad, we see them as good. I am now receiving one- I can tell you they are good. We don’t see pension funds as having to value liabilities with relation to the gilt rates and we don’t see the needs for the draconian deficit funding plans that result from gilts + valuations.
We would like to see pension funds investing in the economic future of this country which is the employers large and small that drive economic growth. We see such investment as long-term and equity based. Pension funds should neither be seen as a problem or ignored as a solution. The current rush for gilts starves our employers of investable money and drains the cash flow of the same companies in demands for deficit funding.
Suggesting that companies return to a system of funding on “best estimate” returns from the pension fund, First Actuarial have shown that in aggregate our pension schemes would not be bust, that pensions would be paid and that pensions could return to being seen as part of Britain’s business success story.
Our FABI index shows the long-term funding position of the type of companies interviewed by the CIPD is considerable more rosy than would be supposed from most gilts + based funding reports.
It shows that on a “best estimate”, the aggregate position of the PPF7800 largest DB pension schemes has always been positive
The CIPD reported the pension perception in the Boardroom as it is. But it has no reason to be; and the doom-mongering that has already accompanied this morning’s publication of its findings and the inevitable calls to either reduce pension benefits or stop Quantitative Easing are unnecessary and misguided.
Pension Schemes Should create jobs
Companies with strong pension schemes see older workers retiring. With no fixed retirement age, a well funded pension scheme benefits productivity allowing new blood to replace old, without a pension scheme, older workers will hang around and new jobs will not be created.
Pension Schemes and their funds can invest in long-term projects that created lasting jobs for people.
But these positive outcomes of proper pension provision can only happen, if pension schemes have the support of employers. The CIPD is only reporting on the mood of large employers in pensions. They are reporting a lack of confidence, there is no courage and no conviction.
We should not be arranging our short-term economic policy around long-term pension scheme funding, nor should pension funds be arranging their funding strategies around a short-term measure – QE.
As anyone who has ever considered financial planning will know, you adopt a different strategy for you long-term liabilities than you do for your short-term cash flow. It is time that our industry stopped poo-pooing this truism. It is not “la-la thinking” at all.
I put the blame for the current situation firmly at the feet of those actuaries and consultants who advise pension funds that the sky is about to fall on their head, it isn’t and it won’t. This CIPD report shows the damage scare-mongering does.
FT Article here
Further links will follow.
Well said Henry, UK DB pensions in the main have done and continue to do a great job in paying out pensions to pensioners every month. I was speaking to an experienced FD and Trustee, recently. He had bought into the idea that DB pensions were unaffordable for his organisation. I asked him if he had considered the consequences for his business if elderly employees could not afford to retire. There had been no such discussions with the HR Director or at board level. His immediate concerns were the short term financial viability of the business, and he saw the DB fund as a problem that had to be managed now, and was not worried by the longer term issues, as he will have been long retired himself, when they eventually surface.
In a nutshell the pensions industry has allowed the current perceptions of DB Schemes to take hold, by not standing up to over prudent regulation. Additionally the industry has been slow to work with Employers in redesigning DB schemes so that they can become affordable.
So Henry please keep up the good work.
A question for you Henry; is it the case that pension benefit guarantees have to be matched by guaranteed (fixed interest) underlying fund assets? Was that a Gordon Brown ism, or am I mistaken?
If that is the case would now be the time to change the strategy (and the rules if they are so designed),to release the capital value of the fixed interest portfolio, and create jobs by stimulating investment in industry, through share and property purchase, instead of investing in government?
It is a question worthy of discussion I believe because if interest rates rise the capital value of those fixed interest assets will surely fall, thus exacerbating the situation, or am I missing something?
QE is an entirely different matter and process I believe and has served its purpose.
Good morning Henry, I expected a response to my observation, question. Have I posed an unanswerable query?
No Terence, you just assume I work 25 hour days!
You are not the first to ask that question, it was asked last week by the Cabinet office and I will say to you what i said to them, there is nothing that require DB liabilities to be covered by gilts and there is great merit in valuing liabilities with reference to scheme returns.
Thank you Henry, sorry for the percieved pressure.
If there is no requirement to back guaranteed benefits within pension ,and other, funds held by insurers and trustees of pension funds why did , for example, Standard Life, dipose of £7.3 million ( or was it a few more noughts) of shares from their pension portfolio , at the bottom of the market, in 2003, to buy into gilts and fixed interest stock, at the top of that market, following a directive from the then chancellor Gordon Brown?
The loss to the public investor was catastrophic and the timing incedibly naive, surely we have to avoid that happenning again if, as you state, no such constraint exists ?