Adrian Boulding has left a comment on yesterday’s blog that is rather better than the blog itself.
As I am on the last day of my holiday in Paris, I will blog the comment and add a few thoughts of my own- with thanks to Adrian!
Now that DB schemes are fully mature, the most important thing is how they are invested. Our system is fundamentally out of balance with the trustees choosing the investments and the employer then picking up the consequences with higher contributions
OK, I know the trustees have to consult with the employer before deciding their investment strategy, but if you check the TPR guidance pages they are crystal clear on this – the trustees must choose the investments that they think are in the best interests of the members and they have no duty or responsibility to follow the employer’s wishes.
The consequence of this out of balance structure is that the only lever the employer can pull is to reduce benefits for future accrual, or occasionally for existing benefits by devices like RPI to CPI switches.
And pulling on this lever will be much more socially acceptable if the succession of stories around unaffordable deficits and only a 50/50 chance of getting your benefits in full continue to dominate the media.
Like many others I am gobsmacked by the level of DB transfer values. My roundtable on them this week produced a case with a multiple of 54! Rather than stop this profligate spending on transfer values employers seem happy to see it continue, perhaps because they’ll pay this high price now to get off the hook of a DB benefit where they pay the future cost but the trustees are the ones taking the decisions that are driving those costs.
What Adrian is saying is radical, and he is not the only one.
The consequence of Royal Mail’s pension trustees flight to caution
The Trustees of Royal Mail’s old DB pension plan delivered a risk-free pension scheme to the employer. It is almost entirely invested in gilts and the cost for future accrual has jumped to 52% of salary.
One has to ask where the risk has gone; the Royal Mail’s answer is that there is no budget for future accrual in the old plan, or in the CWU’s proposed new DB plan, there is only an appetite to pay a cash balance on retirement.
There is a new risk, the risk that the employer’s already weak covenant will be weakened further by a strike by the very workers in whose interests the trustees disabled the old DB plan.
History may record, that the reckless conservatism of the Royal Mail trustees wrecked not just the future accrual of their members but their employment prospects. Royal Mail shareholders may rue the day they let the scheme’s trustees loose on such a fantastical investment strategy. In all this, the only winners are those with deferred pensions with the Royal Mail!
The (potential) consequence of the USS Trustee’s flight to caution
We have the Pension Protection Fund, a defensively invested superfund that is fast approaching self-sufficiency. the vast majority of members who enter the PPF receive a modest reduction in their benefits and often gain better commutation and early retirement factors. I am not saying the PPF is to wished for, but it is very far from the nightmare scenario, that many imagine it.
As Adrian points out, the media headlines of 3m having a 50/50 chance of getting their benefits are not helping confidence in pensions. What is worse is that there is virtually no publicity the other way, the PPF stands behind those 3m, it is working well and should be providing those in schemes with weak covenants with a degree of security.
I know of no other aspect of work, where the prospect of a 10% decrease in salary is so demonised. We all live with the daily prospect of redundancy or dismissal, many of our jobs have been downgraded and millions of us are now on considerably lower real wages than we were ten years ago.
To suppose that pensions are somehow exempt from the pressures that impact wages and indeed the creation and retention of jobs, is to ignore the realities of employment!
How University UK could work with the UCU
We must learn to live with some risk or we will all end up in the mess that Royal Mail is getting itself in.
As for Universities UK, it has two options, either to accept the consequences of the trustees’ proposed shift to a more conservative investment strategy (a loss of future accrual + weakening of current benefits) or it can look again at what the USS pension scheme is trying to do.
I can only suppose that the consequences of the measures suggested in the Financial Times this weekend.
Since then, Josephine Cumbo has posted a further article in which Bill Galvin – the CEO of the USS management company, complains he is piggy in the middle between the unions (calling for a growth orientated investment approach) and “others” suggesting the fund is over-invested in equities. It’s hard not to feel sorry for Bill – his trustees and their advisers want a risk-free scheme just as the Royal Mail Trustees did.
The Union wants to see its members continue to accrue. The Union is accusing the scheme of wilfully driving these cuts by refusing to take a long-term view on investments.
And that will mean looking at increasing not decreasing the scheme’s investments to growth assets and abandoning TEST 1 and the scheme’s goal of being self-sufficient.
The University employers (University UK) have to take back control of the investment strategy if they are to avoid the consequences of the benefit cuts – made inevitable by the trustees’ proposed shift to bonds.
But – and this goes to the heart of what Adrian is saying, the employers have no such lever.
They cannot allow the USS to go the way of the Royal Mail Pension Scheme.
The USS employers have to work with the unions to put pressure on the trustees to abandon aspirations of self-sufficiency, increase rather than decrease exposure to growth assets and accept that there will be volatility in valuation results in the meantime.
It sounds a bizarre twist in UK industrial relations, but the interests of unions and employers, have never been so aligned, as in this current pension crisis.