The Treasury must not use our pensions as their piggy bank-warns Richard Butcher
Yesterday I published a series of tweets from Jo Cumbo on the difficulties the Pensions Regulator would have balancing the interests of members and sponsors with the interests of Rishi Sunak in getting schemes to invest in the nation’s infrastructure.
uneasy bedfellows
Former DWP Pension Minister Ros Altmann was quick to ask a question which has been troubling me.
IS there a clash looming between DWP and HMT? If pensions are to invest in illiquid long-term assets, with potential to boost growth and deliver much better returns than gilts, the charge cap and daily pricing will need to be reconsidered for DC schemes and tPR funding code needs to be rethought in terms of ‘risk’ management. Managing pension risks is about balancing asset classes in a diversified portfolio, not just aiming to remove all risks other than in gilts (which clearly do still have risk relative to pension liabilities given the negative returns and lack of matching gilts)
Ros Altmann’s comment, (which can be found at the bottom of the blog) go to the heart of the matter. The trustees are being asked to consider risk in by the Pensions Regulator in the narrow sense of “de-risking liabilities” . At the same time they are being required to think of risk in quite a different way by the Treasury.
The DWP and its regulator is now looking – (perhaps to avoid this conflict) – to find money for the Treasury’s Long Term Asset Fund (LTAF) and similar illiquid investments from DC pots – where the risk of the fund not performing will land on DC savers. This I take to be the purpose of much of its consultation on consolidation , changes to the charge cap and “improving DC member outcomes” by investing in “less liquids”.
Mindful of the debate going on in her native Australia, Jo Cumbo has now produced a second thread of tweets from a conversation with Richard Butcher, Chair of the PLSA , an independent trustee and a former IGC Chair. In this thread we see the conflicts between these conflicting regulatory requirements – in action.
The UK Chancellor’s call for pension schemes to invest more of their capital in nation building projects, has prompted a strong response from one high-profile scheme trustee, who cautions against members’ retirement cash being used as a “piggy-bank” for Govt initiatives (MF)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
The Government has been scrupulous in introducing its TCDF reporting requirements on pension schemes, not to intervene in the investment strategy of the trustees. The tactic is to ensure that trustees consider the environmental and social consequences of their investments in good governance and Government hopes this will result in good outcomes such as disinvestment from high carbon assets and reinvestment in more socially and environmentally sound projects.
Richard Butcher, managing director of PTL, a trustee firm, & current chair of the PLSA, the trade body, said: “There is nothing wrong in trustees investing in infrastructure, provided it is consistent with the fiduciary duty. The key thing is the fiduciary duty comes first.” (MF)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
This fiduciary duty is firstly to members – to ensure pensions are paid and secondly to sponsors to make sure these payments are affordable.
Butcher said the Chancellor had proposed some very sensible things this week which trustees should support such as Green bonds, but trustees “should guard against any legislation that overrides their fiduciary duty.
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
But green bonds are not the same as qreen equities. If trustees buy into risk free Government gilts that fund investment in sustainable projects, then it is Government paying the coupon and trustees are merely swapping one set of gilts for another. This is easy for trustees and presents little challenge.
The problems come when the call is to invest in much riskier green equities (at least in the short term)
Butcher: “If we fail in this, the pension system becomes, in effect, a big piggy bank for any good, bad or indifferent Government initiatiaves.
“Pension schemes have to try and get the best return for members. That is their first job.”
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
The message is clear, trustees should not be underwriting Government projects, they can lend to them but they should be cautious about owning them.
Cumbo then turns back to her conversation with the Pensions Regulator and considers the same questions with regards “savers”, by which I assume she means savers in DC pensions.
In light of the Govt’s efforts to nudge pension schemes to invest more of your savings in bridge building, and other ‘nation building’ projects, I asked TPR whether trustees should prioritise returns for members or the nation’s economic recovery?
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
Here the issue is precisely the same – “who takes the risk of an investment failing?”
The Pensions Regulator’s response is telling.
TPR: …seeking innovative ways to do so. In principle, investment in a fund such as the LTAF, & in infrastructure, can benefit both the investor & broader economy in the longer term. Investment to benefit members & investing in the economic recovery are not mutually exclusive…
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
This is precisely the message many open DB schemes are trying to give the DWP and TPR as the Pension Schemes Bill is debated in parliament and the DB funding code consultation considered in Brighton. If investing in growth assets such as envisaged in the LTAF is considered by the Treasury in our interests, how can restricting such investment , as the DB funding code seems to do, not be opposed to the public interest?
Josephine Cumbo’s conclusion is that Government is sending out confusing messages to trustees and members. I would agree, the messaging is not just confusing for DB trustees, it is also confusing for DC trustees. For members who may have both DB and DC benefits – the messaging could be doubly confusing.
TPR’s response did not carry a clear statement that returns should be prioritised in terms of investment decisions made by Trustees, looking after members’ retirement cash.
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
Maybe not a “piggy bank”, Henry, but one of my contemporaries has often described the consistent, rather than mixed, messages about getting DB trustees to de-risk into holding more and more gilts as “Orwellian”. As successive Governments find they need to issue more and more gilts at suppressed yields, so a ready line of buyers is set up through myopic regulation of the larger DB pension funds.
As we’re well past 1984, I might quibble and suggest it’s really post-Orwellian.
De-risking into gilts (as Ros Altmann points out) assumes there is no risk in investing in gilts. The myopic regulation you refer to has ignored the wood for the trees and the consequences will be yet higher deficit recovery demands from trustees and less and less money within sponsor coffers to keep jobs, invest in recovery and meet DC obligations.
There is a further dimension to this issue. If trustees decide to follow the Regulator’s guidance, that will not protect them from the wrath of members (and their legal advisors, Sue, Grabbit and Runne LLP). The sale last week of 36 year linkers at RPI -2% strikes me as the prime exemplar of reckless prudence. Schemes buying these are ensuring members will lose 50% of the purchasing power of their retirement savings over that term – these trustees deserve the attention of M’Lud. The question then is how we make TPR accountable for its actions in this regard.
Finally, we should be very wary of government sponsored infrastructure investment in the current low rate environment; the temptation to squander such cheap funds will be very high indeed. Looking at infrastructure opportunities globally is revealing – the best opportunities all seem to lie overseas, and in Africa in particular.
There may or may not be “risk” in investing in gilts. At current yields, however, there is certainly very little in the way of return.
If those demanding trustees you refer to (and many of their myopic advisers as well) looked more often at their cash flows, and less often at marked-to-gilts balance sheets, maybe, just maybe, they might realise how little return is being made from their previous demands for capital?
One of the numbers which is very hard to detect – despite valiant efforts by Con Keating and Iain Clacher and others – is how much capital has been sucked into shoring up legacy DB schemes, over and above ongoing contributions (if any), leaving much less in the employer piggy banks for successor DC schemes. Surely that’s something which so-called impact assessments should highlight?
Some of the evidence is hidden in plain sight in the changing league table of DB schemes by size of assets, for instance the rise of the bank schemes, some of which have been using taxpayers’ capital which yields little but cost them even less.
The Trustees role is summarised as taking an holistic view of how to balance and control the various risks affecting the prime objective of paying benefits in full and on time. As Ros Altmann said for investment this “is about balancing asset classes in a diversified portfolio”.
Long-term infrastructure or other illiquid asset investments will exhibit different risks to retail equities, for example by including an illiquidity risk. It seems to me that DWP, TPR and HMT are encouraging investment in low return (not necessarily low risk) gilts and illiquid infrastructure funds whilst the Trustees and members bear all the consequences of the increased risk from reduced returns and unbalanced cashflows.
By blending different asset classes the Trustees will aim to balance the different risks associated with different asset types. If any investment is over-weighted the risk of failing to pay benefits in full and on time will increase.
If s107 stands as drafted surely those who recklessly encourage such over-weighted investment in illiquid infrastructure projects could be committing an offence and face a jail sentence? Should someone warn the minister and chancellor?
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