Mark Twain reported that reports of his death were exaggerated. A journalist had in fact mistaken his state of health for his brother’s (who was in a much worse way).
The same could be said for the Open Defined Benefit Pension Scheme. There are 6.5m Britains accruing benefits in funded open DB schemes. We do so in schemes as various as USS, RailPen, BBC, Pensions Trust, Saul, Unite, Unison and the Local Government Pension Scheme.
But the remaining DB pensions are in terminal decline and will find their everlasting resting place with an insurer, super fund or PPF. We call these pensions closed, their mantra is de-risking and they really are on the way out.
Confusing Mark Twain and his brother is as bothersome as confusing open and closed DB, which is why the House of Lords voted through an amendment to the Pension Schemes Bill calling for the two types of schemes to be treated differently.
Dogmatism doesn’t help
Open pensions cause trouble. In our flat, I only have to say “future accrual” and the wrath of Stella is visited upon me. If this blog is spotted on social media by the financial engineers, my timeline will be subsumed by vitriol.
In my day as a consultant, I often heard it said that the Pensions Regulator policy teams were for future accrual and the case workers against it. There appear to be few people who swing both ways . This is a shame,
For dogmatism is not helpful , many schemes have no choice but be open. Take RailPen which is in fact 107 schemes under a single trust, 45 of which are open to future accrual. In this wonderful article by my friend Giannis Waymouth, you can understand why many railway companies keep their scheme s open as a condition of tendering for and keeping rail contracts. Sometimes you have to be pragmatic and so long as benefits are safeguarded , so there will be future accrual.
RailPen were the driving force behind the Bowles amendment which , as it stands, means that the it can invest differently for its 45 open schemes than its 62 closed ones. I met the Railpen team who helped Sharon Bowles with her amendment and was struck by how undogmatic they were.
Perhaps this was why they got so many of the Lords and Ladies to support the amendment. While some who spoke for the amendment took the whip and voted against it, the combined power of Baroness Altmann and Bowles seems to have won the day and genuinely surprised the Government.
The task now switches to the Commons who will debate the amendments in September. The message from Railpen is simple, they aren’t looking to change legislation, but clarify it. They accept that the wording in the Bowles amendment could be improved and they are seeking a meeting with the DWP to see if a wording can be found that might prove acceptable to Government and regulator. Clearly what is needed is consensus not an argument, with its current majority the Government could chose to undo the Bowles Amendment if it chose to.
Of course there are plenty of objections to the amendment. One of my friends succinctly summed up why he considers the House of Lords’ Pension Schemes Bill amendment 71 bad news
1. The bird has flown
2 it is flawed as an amendment.
3 adds another conflict to TPR objectives.
4 so needs flesh on HOW to do it.
5 needs anti abuse – add 1 member and ease requirements
6 does it address the real issue of sponsors being on the hook?
7 it is the government’s role to encourage any particular sort of private provision. Not the regulator.
It would make a lot more sense to respond constructively to the consultation on the code.
I look forward to hearing the power of Keating/Clacher refuting these arguments. But my trust is in the calm and persuasive of the Railpen team I met. It is good to know that pensions have such people in them.
Henry
You have laid down quite a challenge there. Particularly as there are some points with which I agree’ However, Iain and I will accept it. It would be premature to respond now but I can indicate the approach we will take:
Start by doing what is necessary;
Then do what is possible;
And suddenly you are doing the impossible.
That’s not original. It is due to St Francis of Assissi
I will though take the opportunity to reiterate our objection to the proposed new DB Funding Code. Neither we, as taxpayers, nor company sponsors can afford it, least of all now given the state of our public finances..
Henry,
Do you think that scheme members will be any worse off as a result of an insurer replacing a closed DB Pension Scheme? I ask this because with a ‘buy-out’ the terms of the insurance policy are required to precisely match the form of the member’s benefits under the DB scheme.
With regards to the PPF, if my own scheme (BSPS2) were to fall into it, I think many members would incur a 10% haircut?…….hopefully this won’t happen!
I meant to say the following:
Taken from this blog…….”But the remaining DB pensions are in terminal decline and will find their everlasting resting place with an insurer, super fund or PPF. We call these pensions closed, their mantra is de-risking and they really are on the way out.”
Henry,
Do you think that scheme members will be any worse off as a result of an insurer replacing a closed DB Pension Scheme? I ask this because with a ‘buy-out’ the terms of the insurance policy are required to precisely match the form of the member’s benefits under the DB scheme.
With regards to the PPF, if my own scheme (BSPS2) were to fall into it, I think many members would incur a 10% haircut?…….hopefully this won’t happen!
Robert
All deferred members like you lose from the buy-out is the opportunity of discretionary increases. Keeping the scheme open you have the upside of possible increases and the downside of the PPF haircut. Most people choose certainty , you don’t actually have a choice but it sounds you are with the consensus.
Thanks Henry.
With regards to deferred members losing the opportunity of discretionary increases in the event of a buy-out, does this also apply to members whose benefits are currently in payment?
I ask this because members who joined the original British Steel Pension Scheme before 6 April 2006 can start taking their pension at 50, so this option is currently available to them if need be.
Generally you shouldn’t be disadvantaged by buy out – no member detriment
Lets give some short responses to the 7 items listed above.
1. If the pension industry is worth the fees it charges, it would show the way forward on how to provide pensions efficiently. This may include defined benefit schemes. This is a never ending task – every generation needs to provide for its retirement.
2. Pension industry experts should use their expertise to advise their clients well on how to run a pension scheme, flaws in the legislation notwithstanding.
3. It is reasonable to have conflicting objectives and to require the exercise of judgement to balance them.
4. See 2 and see 5.
5. If the funding and investment strategies are founded on a cash flow plan, then the strategies will be appropriate whether there are many, few or no active members and many, few or no pensioners. The strategies will adjust to changing circumstances.
6. Partly, yes. An employer makes a pension promise. The money spent on pension payments is raised from contributions and returns on investments made from contributions received in advance. How a scheme is invested affects the balance of pension payments falling on the employer and whether the scheme remains open to accrual, affecting current and future generations of employees. There are better ways of providing pensions than TPR’s strategy of pre-funding increasingly in investments guaranteed to lose money in real terms.
7. The comment “It would make a lot more sense [than amending the pension schemes bill] to respond constructively to the consultation on the code” is mistaken, if I have made a correct insertion. The author has just argued that it’s a government issue. The Regulator can only play the hand it is dealt. Do respond to TPR’s consultation, but also speak to politicians, ministers, civil servants, government.
Thanks Derek, I did have a meeting on this with Guy Opperman on Monday and I now understand he is talking with some open schemes tomorrow (Friday 23rd July). I know he is open to approaches by organisations and individuals who aren’t called ABI or PLSA!