There has been talk of late of pensions in crisis. Infact the opposite may be true. Pensions may finally be getting back on their feet.
News that the retired tycoon – Philip Green has made a voluntary contribution of £363m into the BHS Pension Scheme comes as a relief to the BHS pensioners but also to the pensions system that has been tried and found to have a mechanism in place to deal with egregious behaviour.
Sadly, my colleagues in pensions continue to argue that there are 1000 BHS’s waiting to happen and that our system of occupational defined benefit pensions is an accident waiting to happen. But the actual state of these schemes, measured on what actuaries call a “best estimate basis”, shows that on average most schemes are not in danger of going bust unless the sponsoring employer goes bust.
My company has been publishing an alternative index to the rather gloomy figures put out by the Pension Protection Fund (PPF). The £400bn black hole that the PPF quote is based on schemes being wound up. Our alternative index is based on schemes continuing to operate with their current investment strategies.
|FAB Index over the last 3 months||Assets||Liabilities||Surplus||Funding Ratio||‘Breakeven’ investment return-real|
|31 January 2017||£1,467bn||£1,192bn||£275bn||123%||-0.6% pa|
|31 December 2016||£1,476bn||£1,206bn||£270bn||122%||-0.7% pa|
|30 November 2016||£1,443bn||£1,147bn||£296bn||126%||-0.6% pa|
Our figures suggest that funds on average don’t even need an investment term that matches inflation (a “real” return) to pay every pensioner in full. It is tempting to misquote Oscar Wilde and comment that rumours of DB’s death may have been overstated.
There appears to be some support for this more optimistic view of pensions within the policy units of the DWP. Earlier this month, the Government published a Green Paper which referred to the FAB Index, it questioned whether we were in a pensions crisis and though it discussed the possible dilution of pension benefits where employers were particularly distressed, it didn’t conclude that this was necessary.
The Paper also questioned whether the Pensions Regulator needed to be given extra powers. The BHS settlement will give further credence to this view. There is unanimity that the two major Pension initiatives of the past fifteen years, the establishment of the PPF and the installation of auto-enrolment have been successes in terms of conception and execution. If we add to this the largely successful integration of the State Second Pension and the Basic State Pension into a single state pension then it could be argued that the state of UK pensions has improved markedly in the opening years of the century. Certainly we have moved on and Philip Green has not been a Robert Maxwell.
However there remains a deep issue which troubles politicians, actuaries and pension scheme fiduciaries alike. There is not the confidence among the general public in the pension system to encourage voluntary savings to anywhere like the levels needed to see replacement incomes above the current projected average of 38% predicted by the OECD for 2050.
If we as a country feel comfortable taking a 62% pay cut when we quit working, then the low replacement ration is not a problem. But ask any working person today if they were happy to sustain such a cut and I doubt all but a tiny minority would be prepared to accept it.
In truth, most of us will need to supplement our pension income (the 38%) with part time work or have a successful plan B such as a proper buy-to-let portfolio. The issues of adequacy are not going to go away until people choose to use the generous tax reliefs on offer to those saving using pensions. Working longer may be a solution for those who can works but there are limits to our health and to the labour market for older people. The Institute of Fiscal Studies has pointed out that if older people do not retire, younger people may not be able to get the jobs (let alone the houses) to save for their retirement.
Some point to compulsory pension contributions as the answer, others to an increase in the default contribution rates for auto-enrolment. I suspect that there is no appetite for compulsion in big Government, flies in the face of pension policy over the past 60 years.
Instead I expect to see a focus on the supply side of pension. Increased Government pressure on pension governance, transparency of costs and charges and a drive for greater innovation through the use of the block chain in the settlement of pension investments and payments. Coupled with this I expect to see demand from consumers for better ways to manage their pension savings and in particular demand for non-advised products that convert the capital in pension pots into the income needed to allow us to stop work.