An alternative to the dystopia of “pension de-risking”




Positive alternatives to de-risking are emerging


One interesting thing about this episode is that we have seen the Pension Regulator’s preferred view ahead of the final legislation itself. Their usual defense of ”It’s the law that Parliament decided, and we are only implementing it.” has no clothes.

The missing statutory duty, to promote high-quality pensions, has allowed them to preside over and encourage the wholesale closure of DB schemes. This is a good first step towards rectifying that oversight. – Con Keating  comment

The wholesale closure of the corporate defined benefits schemes that were quite recently described by Frank Field as Britain’s economic miracle, will be considered by history an economic act of cowardice.

Once corporates were convinced of the short-term advantages of moving from open DB pensions to workplace DC pensions , the pensions agenda moved to the flight-path to buy-out. Provided the compliance officer approved, anything that improved the price of pensions on the balance sheet was justified by “de-risking”

The dystopia of de-risking

In the name of de-risking, schemes have been denuded of members through enhanced transfer value “exercises”, pensioners denuded of pension increases through “pension increase exchanges” and members have been persuaded to swap  pensions by vertically integrated financial advisers for what Steve Webb used to call “sexy=cash”

Companies have been able to book substantial improvements to their balance sheets from all this but are now faced with the consequences of over-paying for the de-risking. In the end, the accounting trickery is catching up with them.

The real money that has left our DB schemes has often  been squandered on over-complex, over-priced investment solutions that feed the wealth management industry. Now the advisers are subject to various reviews from the FCA. The advisers are also being pursued by claims against their PI from FSCS and these are likely to be accompanied by private litigation organised by legal firms as class actions

This great program of de-risking has been organised by corporate pension advisers, legitimized by pension lawyers and nodded through by scheme actuaries and consultants. All has been in the name of de-risking.

The “Mr Bigs”of this sit in the glass-fronted offices of More Place, Canary Wharf and the City of London and ,unlike the small-time IFAs, appear invulnerable even to criticism.

in all this , the interests of the former beneficiaries of the pension schemes are now looked after by firms whose continued existence is put in doubt by the weight of transferred money under management.

Putting things right

As Con Keating points out , the Pensions Regulator has fallen in line with the market’s position on de-risking and revealed in its DB funding code that it has no interest in those

  “who have found good ways to make their DB schemes flourish and last”.

There is no likelihood that change will come from the offices of those who have benefited from the closure of DB. Change is likely to come from outside the tent.

The quote above is  from Sharon Bowles’ summing up of her argument for an amendment to the Pension Schemes Bill which allows open defined benefits not to de-risk but to invest for the future. You can read her argument here.

Her amendment was successfully passed in the Lords and I hope it makes it to the Pension Schemes Act .

There is an alternative to de-risking and it’s one that is likely to find more favor as a result of this pandemic. Rather than de-risking the pension schemes we spent 60 years building, we should be de-risking the members of DC pensions by focusing on what we did right for them when DB schemes were working.

This means looking at open collective arrangements ,whether DB or DC and promoting them , not as finite, but as open.

CDC lifecycle

Where DB is open, let it stay open and where DC is failing, let’s find ways to recreate the a collective approach which shares the risks between the members.

In a very real sense , funded pensions work when we’re all in it together. De-risking destroys collectives and requires people to go it alone. That doesn’t work.

If we want a more open , financially inclusive, pension system – we have to keep pensions open and collective.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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