Pension promises- “second hand not second rate”.

There’s an old Elvis Costello song (Senior Service) which talks about the DWP

They took me in the office and they told me very carefully
The way that I could benefit from death and disability

I thought of it as I endured 90 minutes of the pension senior service pontificating on how occupational schemes could get out of their pension obligations by agreeing with the Pensions Regulator they were “stressed”.

Apparently “second best solutions” are now all the rage with economists, Costello wrote about people shouting out against them (back in 1979)

Though it may be second hand
It’s by no means second rate

and describes accepting second-best in the chorus

Senior service
Junior dissatisfaction
It’s a breath you took too late
It’s a death that’s worse than fate

A series of second-best “get-outs” from the PPI

I am generally a fan of the PPI, but I am not a fan of its response to the DWP’s DB Green Paper. It presents a series of second best solutions from the senior service to manage “junior dissatisfaction”.

Trustees should have access to a streamlined RAA if they conclude, based on actuarial and covenant advice, that full benefits are unlikely to be paid, that insolvency is likely, and that the result is better than insolvency.

Which will be interpreted by employers as a union-friendly alternative to wind-up , with none of the expense of proper wind-up or ignominy of a “pre-pack” into the PPF.

“TPR should collect additional funding data to create an ‘early warning system’ of schemes in stress and, to do this, we propose it uses a general purpose measure for large funds and a mechanical measure for screening smaller funds”.

What is this doing that is not already being done by Experian for the PPF. The proposal risks creating a “senior service” of schemes with options for larger schemes to negotiate special privileges while smaller schemes are subject to “mechanical screening” – presumably with minimal interaction. This two tier approach will please those who want small schemes consolidated but does nothing for the efforts of the sponsors and trustees of those schemes.

TPR should require all ‘stressed’ schemes to employ a professional trustee

Although professional trustees do a lot of good, they can be a hindrance to a well governed scheme. The implication that stressed schemes need more professional trusteeship is based on what? If I was a trustee of a “stressed” scheme, I would expect the decision on the trustee board’s composition to be a matter of discussion with the sponsor. IMO- the Pensions Regulator neither needs nor wants powers to intervene in this way.

Giving TPR new powers – to alter indexation, alter benefits and interview stakeholders – would help deliver second-best outcomes.

The senior service at the end of the document, reveals its final solution.

Giving tPR such power would hand consultants who focus on “de-risking” an opportunity to lobby that all their clients were “stressed schemes”, that all their clients could not afford current benefit promises and that tPR, rather than the sponsor, should be the agent for benefit reductions.

Sponsors would be able to play dead till the scheme was “second-bested” and make a lazarus-style recovery thereafter. No need for a pre-pack, just lie doggo for a couple of months.

All this from a fundamentally flawed valuation premise.

I dispute David Blake’s assessment that there are 1000 schemes in the terminal ward and that 600 of them show no hope of recovery. The assumptions made are based on the PPF valuation method which is not suitable for schemes with long-term aspirations to pay pensions.

It is only appropriate for measuring schemes through the lens of the PPF – which is looking for schemes with short-term risks of becoming insolvent. The reason so many schemes appear weak is not because of poor trusteeship or high costs but because they are being measured using a valuation system which is skewed by the impact of QE.

Sooner or later we will move away from negative gilt yields and deficits will reduce. Sooner of later schemes will revert to using best-estimate valuations and deficits will reduce. Sooner or later, employers will return to their original premise that they are in the business of staying employers and that part of the employment contracts, they are in the business of honouring pension promises.

We do not have to have second-best pensions. The PPI should not be suggesting that we do. The PPF is the safety net, there may be ways of making the safety net better (the report may have good ideas on this) but there is no reason to have a variety of safety nets.

Second-hand, not second rate.

The promises that trustees and employers make today are second-hand, generally they did not make those promises. It is all too easy for inherited promises to be neither “owned or met”.

We are at risk of offering trustees and employers a variety of signals, collectively confusing. Let’s keep it simple. Binary is not necessarily bad. You either pay out on your pension promise or you go bust.

That is a message that I would get behind, it keeps the eye on the ball. Let’s make sure that every pension payment is paid in full and stop wasting time on second-best solutions.

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 Pension promises- “second hand not second rate”.

  1. George Kirrin says:

    Lipsey and Lancaster (two of the economists you allude to) demonstrated a theory of the “second best” which is seldom referred to be by adherents to efficient market and capital asset pricing model theory.

    I wonder what Con Keating makes of it?

  2. henry tapper says:

    Con Keating was at the event, i spoke to him after. He asked how tPR would deal with a stressed employer who made a Lazarus like recovery after getting concessions – and the criticism from members who had had their benefits unnecessarily clipped.

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