A major contribution to the practice of funding pensions

Despite most of us saving into defined contribution retirement plans which provide no pension and rely entirely on investments and contributions for their outcomes, the defined benefit plan remains the source of most retirement income for the UK. Most defined benefits are paid from the “state purse” with today’s taxes paying today’s pensions, but a large amount of money remains to fund DB pensions within corporate schemes and the schemes of some Government organizations such as LGPS and the parliamentarian’s own scheme.

It’s well known that these funds are considered in deficit, though whether they are and the quantum of deficit is a matter of constant debate. There is little authoritative thinking about what constitutes adequate funding and when fresh thinking becomes available , it’s good that it gets promoted. Here is some fresh thinking. Press the link below to access this thinking, a paper published by Long Finance.

Discount Rates, Defined Benefit Pensions and their Sponsors. 

It is written by Con Keating, Iain Clacher,  Mark Freeman and Alan Duboisee De Ricquebourg. It is a deeply serious work which will repay your scrutiny if your interest is in the most economic use of capital to support our funded pension framework. I quote from the paper’s introduction on the Long Finance website

The authors describe the role and function of a discount rate, and critique the methods presently in use for calculating discount rate determination, including those contained in the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (OPS (SF) 2005). They then go on to propose a method of discount rate determination which could be used for establishing the accrued value of the liabilities of the sponsoring employer (the Contractual Accrual Rate (CAR)) which has particular merits for the management of Collective Defined Contribution schemes. The paper concludes with discussion of Collective Defined Contribution schemes, followed by consideration of some practicalities for the introduction of the CAR.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to A major contribution to the practice of funding pensions

  1. Jnamdoc says:

    Henry – re “Most defined benefits are paid from the “state purse” with today’s taxes paying today’s pensions, but a large amount of money remains to fund DB pensions within corporate schemes”, but the Regulatory pressures in the UK are coercing Trustees to divest from investments, and to de-risk (a misnomer) – through a series if intermediators (ie insurers etc, all taking a slice) into Govt Gilts. So, the big picture is that even the ‘private’ schemes are being nationalised by stealth into Gilts (ie future taxation. But the youth of today (ie the affected taxpayers) will not stand by those promises, that they were not a party to giving). Re the Regulatory regime – we are now in a crazy situation where Investment = Risk; Risk = Bad = civil / criminal sanctions. And despite nice words, no one at TPR has confirmed that you cannot go to jail for investment approach.

  2. ConKeating says:

    The Pensions Regulator has been responsible for promoting a number of falsehoods which have harmed DB schemes. It’s latest in low-dependency and de-risking. They are promoting the untruth that mature DB schemes are riskier than immature. Now as schemes mature the payments they need to make decline, and the uncertainty in those pensions also declines. So a declining exposure and a declining level of uncertainty in those pensions – how can that possibly be riskier?

    • Jnamdoc says:

      Yes, agreed, and as the cult of de-risking hits its limitations, its defenders will resort in Spanish inquisition (or is it Monty Pythonesque) type responses to devise more and more severe punishments to mete out to the non-believers.

  3. Bob Compton says:

    Henry, I have over the years followed Con Keating’s various essays on CDC & CAR with interest, but have mentioned to Con that often his articles would be difficult to follow for most readers including experienced actuaries.

    Having just read the Long Finance paper I must congratulate the Authors for producing a readable and easily assimilated paper on the working aspects of CAR and providing clarity on when and how DB pension schemes could/should adopt their use, and why TPR should reconsider it’s current stance on DB funding.

    I would suggest this should be required reading for all involved in TPR’s DB funding consultation, that includes The Regulator team, DWP, Pensions Minister, Actuaries, Accountants, FD’s, Trustees and even interested Lawyers.

    In my view CDC schemes could be the future for a majority of people with DC pension pots to find a cost efficient method of dependable income in retirement. The last paragraph of the paper makes reference to CDC. The use of CAR in my opinion is probably the only method for CDC schemes to truly establish fair value for CDC members regardless of age, and hence remove detractors quite rightly raised issue of the potential unfairness of intergenerational cross subsidies.

    This aspect should be pushed hard right now as we are at the start of a new generation of pension provision. If this is not adopted across the board as a standard approach to CDC scheme management there will be major problems arising in 20 to 30 years with miss allocations of future pension payments.

    • henry tapper says:

      Comes of associating with people like you Bob!

    • Chris Giles says:

      Bob – I couldn’t agree with you more that TPR, DWP, Pensions Minister et al should take a broader minded approach to DB funding. They need to engage with TESSA (There-Exist-Several-Sensible-Alternatives, of which CAR is undoubtedly one) instead of TINA (There-Is-No-Alternative)!

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