A Minister Drinking the Regulator’s Kool-Aid – No Consolation

An article by Con Keating

The  preamble to a recent article in Professional Pensions by the Pensions Minister, Guy Opperman, read: ” In the fourth of a five-part series of articles for PP, pensions minister Guy Opperman sets out how revised funding arrangements for defined benefit schemes will better protect members.” So, this blog will consider in detail the claims and assertions made there together with the assurances given. It supplements those with extracts from a speech made by the Minister to the Association of Member Nominated Trustees on December 20th.

The article commences with: “Making pensions safer by properly protecting members’ benefits is a core part of the Pension Schemes Bill.” (emphasis added) There is no justification for describing the Bill and the related Funding Code as being either the, or even a proper method of protecting members’ benefits. These will raise the funding requirements for all but a few schemes, open or closed. It does not address the shortcomings of the Pension Protection Fund or sponsor insolvency which give rise to the need to protect members’ benefits. In his AMNT speech, the ambition was wider; to make pensions: safer, better and greener”. But in the first of his series of articles, “safer” is described as having a much more limited remit: Safer, by cracking down on scams and unscrupulous bosses.”

The article continues: “There too many examples where individuals’ hard-earned pension savings have been put at risk.” We shall put aside the observation that only the contributions made by members and perhaps their employers may be considered earned, let alone hard-earned. Contributions account for only a very small amount of the pensions promised, perhaps 25%. A DB pension is a corporate promise, and like all such promises it has elements of risk. The Minister is doubtless aware that even the State Pension is risky, as is clearly demonstrated by the rationale advanced by the Treasury for not including the capital values of this as a liability in the National Accounts being that these are discretionary benefits. This becomes all the more relevant in light of the recently announced changes to RPI and index-linked gilts. Uncertainty and risk are facts of life. It is not the extent of risk that matters but the extent of scheme failure that we should be concerned with, and that has been modest. Moreover, this has been well within the capacity and capabilities of the PPF. It should also be recognised that most risk with financial instruments and institutions is endogenous, and in the case of DB pensions, the Regulator is the major source of those existential risks.

“And that’s why the scheme funding measures focus on planning for the long term, and on clearer funding standards.” Another fact of life is that solvency metrics are intrinsically and fundamentally short-term. Moreover, the Regulator promotes its concept of integrated risk management as part of the new regime. However, this is also short-term and misattributes risk over time[i]. Simply put, there is nothing clearer about the proposed regime; it is merely different from the statutory scheme funding objective.

The article continues: “The government does not want good pension schemes to close unnecessarily.”  Why is it not simply that we do not want any scheme to close unnecessarily? This raises the most obvious of questions: how is “good” to be measured and by whom is the judging to be done (members are likely to have a very different view to a Regulator or a sponsor)?

“But the members in these schemes need appropriate protection.” In other words, these good open schemes will be required to follow the low-dependency nostrums of the Regulator and suffer additional costs. This is a tacit recognition that the institution created to fulfil this member protection function, the Pension Protection Fund, has failed or there is a real concern that it does not have the capacity to achieve what government intended when creating it.

This paragraph of the article concludes with: ”If employers want to offer defined benefit pensions as part of their recruitment and retention strategy, they must be able to pay the true cost of providing those benefits.” The absence of reward from the employer strategy listing is telling. Obviously, employers should be free to determine the generosity of their pension schemes, and they must bear the actual cost of that, with the investment portfolio offsetting some or all of those costs. Unfortunately, the Regulator’s idea of true cost is the cost of some other entity providing those benefits i.e. an insurer through buy-out, and these are inevitably far higher than the cost to the employer sponsor of running the scheme off. The idea of self-sufficient or low dependency asset portfolios for schemes is simply another incarnation of the cost of this provision by another.

“That is why we are building on our successful scheme-specific regime.” This is a statement that simply does not chime with reality. If the scheme specific regime has been successful, the proposed funding code and regulation are unnecessary, and should even now be abandoned. “The right thing to do is to take account of the actual circumstances of individual schemes when deciding what investment risk is supportable.” This puts the cart before the horse. It is the extent to which the investment portfolio mitigates the costs and risks to the employer that should be considered. And that extends most importantly to the liabilities where the current methods of valuation introduce both bias and spurious volatility into scheme and employer accounts.

The penultimate paragraph of the article continues with: “That doesn’t mean that we want all open schemes to de-risk like closed schemes.” This is reassuring with respect to open schemes, but the case has never been made by the Regulator or Department for de-risking of closed schemes. The risk of a closed scheme is in any case, strictly decreasing as time passes and pensions have been paid. The next sentence: “We want a truly bespoke approach, considerate of individual schemes and their characteristics.” is clearly intended to placate the common objection expressed in consultation responses that benchmarking to the fast track approach is inappropriate. Rather than describing fast track as being objective, it would be more correct to describe it as arbitrary.

The paragraph ends with the longest and most qualified sentence of the entire article. It weakens the earlier assurances significantly. “We will use the regulation-making powers to ensure that the secondary legislation does not prevent appropriate open schemes from investing in riskier investments where there are potentially higher returns as long as the risks being taken can be supported, and members’ benefits and the Pension Protection Fund are effectively protected.” There are numerous problems here. It limits the earlier assurances to open schemes and more so only to the subset of those which are “appropriate” and whatever that means is left worryingly undefined. It also restricts the assurance to the de-risking of assets. For most open schemes, the increase in the amount of assets required to achieve low-dependency is an order of magnitude higher in cost importance than that. Finally, it seeks to alter trust law and impose on trustees a new duty to protect the PPF, something which neither the Minister, the Department, the Regulator nor the Act itself have the power to do.

And the article begins to wrap up with: “The detail of these arrangements will be set out in secondary legislation which will be subject to consultation and we look forward to engaging with interested parties in the consultation.” More correctly, the proposed Regulations are subject to scrutiny and acceptance by parliament. There is an ambiguity in the following sentence: “We would encourage everyone to engage with The Pensions Regulator’s consultation on the revised defined benefit funding code of practice, as we seek to refine the details of the regime.” If this is a reference to the already proposed code, we need to see the Regulator’s response to the 130 submissions already made before engaging further. If it is meant to imply that the Regulator will revise the proposals already made, we look forward to seeing their detail.

The article ends with “Full impact assessments will be produced both for the secondary legislation and the revised funding code.” The absence of any impact assessment for the proposed Code was simply astounding. The assessment attached to the Pension Schemes Bill was simply not credible at any level. We will seek full disclosure of the Full assessments.

The first article concluded with: “This bill will help shape the pensions industry for years to come, bringing it into the digital age and offering a pathway for pensions to thrive as our planet and economy changes at a rapid pace.” It seems to us that the proposed Code is an elaborate funereal ritual that, far from allowing pensions to thrive, will cause the final and extremely expensive demise of occupational DB provision in the UK.

A final concern is that we were surprised when we compared the recording of the Minister’s statements and assurances to the parliamentary bill scrutiny committee with the Hansard written report of these exchanges; these were not a verbatim account. The extent of these discrepancies was rather more than obvious errors such as consolidation in the audio becoming consolation in the written. The difference was a worrying and wholesale softening of expression and qualification of statements in the written account from those in the audio. These speeches and articles do not allay my concerns.


[i] See: Jon Danielsson, Systemic Risk Centre, LSE. 2020:

Risk Landscape: Review 2020 & Preview 2021 | Systemic Risk Centre

About henry tapper

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