John Ralfe and Steve Webb don’t see eye to eye
I’m sorry to have missed the FT’s DB funding debate, it sounds like a lively affair!
Mercer, the professional services firm, last week estimated the aggregate accounting deficit for DB schemes for the UK’s 350 largest listed companies was £52bn at the end of April, compared to a surplus of £10bn the month before, as equity markets and interest rates experienced record falls.
Recommended Final salary schemes Pension transfers under lockdown Sir Steve Webb, former pensions minister, said it did not make sense to continue with the consultation in the current environment.
“It was a document written in a different era,”
said Sir Steve, now partner with Lane, Clark & Peacock, a firm of actuarial consultants.
“This isn’t just a three-month blip and everything goes back to normal. We are in a different world, at least for the medium term. If you look at that (revised) funding code, scheme recovery plans were going to have to be a lot shorter. Does that make sense in the world that we are now moving into?”
The debate is raging not around the financial economics of mark to market valuations but of the priorities that we put on pension promises against other promises in the workplace. So John Ralfe can find support for a hard line position from Mark Rowlinson and Mike Harrison – normally moderates in this debate. Meanwhile the former pensions minister has moved towards a less regulated approach.
This realignment is – as Webb says – around your view of whether business as usual after the pandemic is on old or new normal. Forgive me for using politically charged terms but this is really about conservatism and liberalism with the conservatives looking for a return to the old certainties and the liberals, looking to a progressive future.
It is enervating to have such debate and I’ minded of Wordsworth’s recollection in the tranquility of older age
Oh! pleasant exercise of hope and joy!
For mighty were the auxiliars which then stood
Upon our side, we who were strong in love!
Bliss was it in that dawn to be alive,
But to be young was very heaven!
There is now an opportunity to re-evaluate the way that pensions work for people that takes into account the wider societal issues of employment and welfare. Consideration for those too young to have benefited from DB, for those who were not fortunate to have worked for an employers with a strong pensions covenant or an employer at all.
Consideration too for the massive cross subsidies between one group of tax-payers and another that has led to a large proportion of the UK workforce finding themselves dependent on the state pension, pension credits and the scraps of workplace pensions whilst paying taxes for their peers to retire on career average or a final salary based pension – as well as rights from the state.
The polarities of this debate are intensified by the insistence by those who have them, on guarantees and by those who don’t – on the capacity to save.
The capacity to save
For future generations of those retiring, the option of a pension from private means is dependent on their capacity to save. The primary driver for this capacity, is the ability to work. We are facing, when this furloughing is done, a massive hike in unemployment which will include many over fifty losing work which they may find it hard ever to recover.
Those who talk about the recovery plans of defined benefit pensions would do well to consider what recovery plan there is for the older worker in a time of sustained recession. So I side with Sir Steve Webb. Shortening recovery plans risks driving the remaining employers accruing guaranteed pensions into closure. It drives employers with closed DB plans and weak covenants into the PPF and it means that millions of workers will be facing even greater hardship in their personal recovery plans.
I don’t think that those who have charge of DB pensions (and were among the 700 people who could attend this session) have got the message
Poll taken at the start of the FT debate
The follow-up question
For me – the key question
A direct appeal to David Fairs, Charles Counsell and the Pensions Minister
Yesterday , Guy Opperman tweeted in praise of the current measures being taken by Government to protect workers from the most grievous impact of the current situation
Mind blowing Stats ⬇️
24% of all UK employees have been furloughed … in 2 weeks.Whatever your politics, this is unprecedented, and a massive effort by govt 👏👍 https://t.co/7nEgGiCXAl
— Guy Opperman (@GuyOpperman) May 4, 2020
I agree, the Government has acted decisively and have been very effective. The intervention of the furlough shows that for limited periods – we hope between now and vaccination, Government can spread the acute pain of destitution , exchanging it for the long term ache of higher taxation. It’s called smoothing and it’s what Steve Webb is suggesting happens in pensions.
Against this view is the Darwinian view that schemes who are strong will survive and the rest will go to the wall
“…those schemes that have already got long-term targets and journey plans and mitigation…. are coming through the crisis in relatively good shape.”
Spot on from @TPRgovuk.
You don’t stop flying the #pensions plane when you hit turbulence. https://t.co/6uR5ytRBoe
— Mike Harrison (@HigherEdActuary) May 5, 2020
I strongly disagree with Mike’s position. I call on Guy Opperman , Charles Counsell and David Fairs to call off this DB consultation and to take the decisive actions that have seen elsewhere in Government.
And most farcically, the USS are pressing on with their valuation
The poster-boy for the “no retreat- no surrender” hard line , espoused by Mike and others is USS. Even in the teeth of the gale it decides to press on with a valuation that will surely be torn to shreds by the impact on universities of the incapacity of students to use the campuses they have so expensively constructed. The underinvestment in teaching is now being exposed. The lack of prudence in competing for students through ever more extravagant extra-mural facilities is resulting in a realisation that many universities are under exponential threat
Prof Adam Tickell, vice-chancellor of Sussex University, tells @BBCr4today some UK universities will not survive the current economic crisis. #USS
— Josephine Cumbo (@JosephineCumbo) May 4, 2020
The FT, unlike many in the pension industry, has recognised that we cannot return to the old certainties
The business world can never go back to the way things were https://t.co/iXtdRBB2y6 via @financialtimes
— Josephine Cumbo (@JosephineCumbo) May 5, 2020
It is now time for the pensions industry to decide whether it wishes to cocoon itself in the certainty of yesterday or move forward with the rest of the country. I urge you to listen to this webcast (free to listen thanks to the FT)
A full recording of this afternoon’s #PensionFundingStorm webinar with @david_fairs @stevewebb1, Judith Fish and myself is now live and free to view on the @FT website.https://t.co/Dt7BQQaY3M
— Josephine Cumbo (@JosephineCumbo) May 1, 2020
Henry
its a shame you missed.
It is important to start to put out there some narrative to question the ongoing validity or suitability of the current DB regulatory funding regime – it was designed (in the 2000’s) in a time of general economic surplus and buoyancy to ensure (politically) that Pensioners got their share, and is not suitable for the current environment.
Pension deficits calculations are very arbitrary and are as at a point in time (they are not ‘real deficits’), but pension deficit contributions really do take money away from the real economy, and are a negative drag on jobs and growth (a BoE research paper last year confirmed this), and damage the prospects of the younger.
The main beneficiaries (of the current DB pension funding regime) are the elderly, who get a sense of greater security, and also more so the City that scoops up more assets under management, and Politically its an easy soundbite – more money for Pension and the NHS. Of course, if the increased deficit funding damages the economy, and stalls the growth that will be critical, then that sense of additional security is illusionary – without a vibrant economy, there is no ability to pay for the pensions of the elderly as expected.
This issue should (intellectually) be tied into the Nation’s response to COVID which (right or wrongly) has centered around protecting the elderly, at the expense of the jobs, education, and economic prospects of the young, who will also have to pay the bulk of the resulting tax bill ( or socialism) to pay for all of this…
So, in summary, we are in danger as a Nation (by inertia as much as anything else) of responding to the current crisis based on the viewpoints of a (middle class / middle aged) political / technocrat / civil service , resulting in a sequence of policy responses that react to the short term concerns of the elderly, and so damage the longer term prospects and ability to work through this situation.
In short, actually less money into DB deficits, and more money into investment, jobs and education.