DB pensions; experts are the problem, people are the answer.


Are pension schemes in crisis (or is it all about how you value them?)


The best thing (for me) about going to the international Longevity Centre’s launch of their study of DB deficits was John. I’d seen him when I walked into the committee room in the House of Lords, he had his union shirt on. He was a shop steward and a trustee. He’d only been a trustee a short while, this was his first experience of “experts”.

John was impressive, he took it all in his stride, afterwards we talked about what we heard. We’d heard talks from actuaries, academics, lawyers and insurance men. John explained that the workers he represented (he’s a shop steward as well as a trustee), were share-owners and took a big interest in pensions (both defined benefit and contribution).

He wanted to understand how the abstract ideas being discussed in the room could be explained to his people.

As I wrote the meeting up for my colleagues, I tried to use words that could explain where people were coming from that John could use.

Some people in the room wanted pension funds to be run one way and some another. In the end , Trevor Llanwarne, the former Government Actuary said a wise thing. He said that till we agreed what these defined benefit pension schemes were for, we would all be arguing with each other.

The lady lawyer saw defined benefit schemes as a challenge to the proper management of our private sector companies, getting in the way of shareholder value. Her measure of success was to see them bought out or at least “immunised”.

The man from the insurance company wanted to use the Pension Protection Fund to wrap its arms around all the little schemes and create a great sovereign wealth fund.

The actuary who knew a lot about how many people were dying wanted us to use his knowledge to reduce the amount we reserved for what we don’t know – by £25bn.

The Professor got very angry and told everyone that Government had ruined everything with their imposed guarantees, pension taxes and freedoms.

It was obvious that all of these people could have argued all day from their positions of authority.

But the Government Actuary wasn’t impressed (his arms were crossed) , neither was I , nor was John.

Infact we did get some questions at the end of the discussion but not many, if the purpose of the IFA’s report is to inspire a wider discussion, I suspect it won’t. This would be a shame; here is the conclusion of Ben Franklin and Dean Hochlaf’s  study (you can download  here http://tinyurl.com/j5e3dgh).


It’s not a conclusion I share. I challenge the premise on which these comments are made, that there is a new economic and demographic normal which makes the idea of a defined benefit scheme (as we know it) unmanageable.

My conclusion was that what was creating the “vicious circle” of persistent deficits were the technical solutions to a problem set by the “experts” in the room. The insurance man correctly (IMO) saw the problem as being how we looked at pension scheme valuations. He saw three ways (mark to market , mark to model and mark to myth). If mark to myth was Mr Micawber’s “something’s about to turn up”, then the two serious ways of looking at pensions are with a lens that values pensions as if you wanted to wind them up or keep them going.

He also made the point that Government had commanded Trustees to ensure that members get their pensions paid in full (PA04) and ensure that they don’t put the employer in danger (PA14).

What wasn’t discussed was that if you used the mark to model basis of valuations and valued equities rather than dismissed them, the doom of the Professor was replaced by an optimistic view of schemes that suggested that while some schemes would fall into the PPF, there was no cause to panic. I expect the experts considered this “mark to myth”, but in case there’s doubt – here’s the chart, the blue line is mark to model, the purple mark to market (same schemes)


30% in deficit or 30% in surplus? It depends how you look at it!



Nobody on the panel saw any value in keeping schemes going the way they are;  I did, John did.

The debate took the view  that “we” wanted schemes to be sufficiently solvent that they could be bought out by an insurance company or  absorbed into the PPF.

No argument was put forward about the economic benefit of having defined benefit schemes sponsored by employers and providing certainty to people like John.

John was the most important person in the room and he had no voice. Trevor Llanwarne , in asking what a scheme was for, could equally have asked who a scheme was for. John would have had no difficulty articulating for whom his scheme was for.

When I’d earlier asked Nigel Wilson (the man in charge of Legal and General) what he thought the greatest threat to keeping our promises was, he didn’t point to macro economic arguments like “the new normal” or EU regulations , or over prudent mortality assumptions or even our valuation systems.

Nigel Wilson said “people”.

Our capacity to get out of what is termed a defined benefit deficit crisis, comes down to the attitude of the people in command. As Trevor Llanwarne said, we need someone to take a lead and get consensus on how we go forward. In my view, pensions are about people, all the people in the room plus millions of others who need to know what they have to do to get comfy in retirement.

The experts in the room weren’t helping because they weren’t listening. John had no voice. We had not really had no thoughts about people at all.

Thanks to all at the ILC for setting this up , thanks for Sally for chairing and thanks to Ben and Dean for the paper!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to DB pensions; experts are the problem, people are the answer.

  1. I agree with you, Henry, together with John and Nigel. The rest is commentary.

  2. Steven says:

    Unfortunately Henry, DB as in final salary/care are on their way out and not coming back. The risk of contribution volatility is simply too great for a company to be willing to run it in the way that you suggest with higher investment risk.

    However, wouldn’t the DC world were John decides to take the higher investment risk provide a similar outcome? They key here is being getting companies and members to pay sensible contribution levels and not use the move to DC to reduce contributions.

  3. eneagu99 says:

    There is no one interested to have defined benefit pensions in the UK. They are seem as risky, expensive, etc. In a Globalised word there seem notti be a place for these! Hmmm,,,

  4. henry tapper says:

    I suspect your facts are “alternative” Eugene!

  5. DC is too inefficient and without pooling of risk on decumulation cannot compete with DB for same contribution.

  6. Julie Richards says:

    I have long held the belief – and some frustration at “traditional” bias – that it is not a case of “DC bad, DB good” for many reasons. There are good and bad in both categories. In my view the important factors are: realistic expectations; good basic financial education ideally as part of the school curriculum; honest, transparent communications; good governance (including investment quality oversight). DC is not inherently wrong and King Canute would have given up trying to withhold the tide against DB long ago. And for those of you who are now bashing the life out of their key boards to tell me how wrong I am, all I would say is that I am a realist and would rather spend my energy on making sure people make informed decisions about whatever savings they make (be it pension or otherwise) – that DB horse has been too far from its stable for nearly 20 years now.

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