This blog is written as a tribute to Stefan Zaitschenko whose positive mindset has meant that his fellow pensioners have been awarded a bonus of £57m. Stefan thinks positively about pensions and is an example to us all.
From deficit to surplus
Most people who have been in pensions for more than 20 years can remember conversations about surpluses- “who owns them?”- whether they are a store of grain against 7 years of famine to come and so on.
We are moving to a world where DB schemes are beginning to turn to surplus. Yesterday, the new BSPS scheme declared a one off bonus to those who joined it in the “Time to Choose”
Some 50,000 pensioner members of British Steel Pension Scheme II will receive a one-time extra payment, worth collectively £58mn, due to the pension fund’s positive results – https://t.co/IDWG5Zdbw9@BritishSteelUK @TPRgovuk @landg_uk #definedbenefit pic.twitter.com/cj9HjOSqvZ
— Pensions Expert (@pensions_expert) March 25, 2022
Schemes that have have “de-risked” will find that the potential gains from rising interests will accrue to the counter parties of the derivative trades they entered into, meaning that the surpluses will be paid to banks and other abundant holders of capital.
Schemes that did not use the markets to increase their exposure to bonds, will find the notional reduction in their liabilities creating a surplus in their DB scheme’s funding position. The same may be said for schemes that swapped out longevity prior to recent changes in mortality rates, the insurance are unwinding and the winners are the counterparties. As Con Keating’s recent blog points out, the cost of borrowing to buy extra bonds and of insuring against longevity going the wrong way, is paid out when interest rates and longevity go the “right way”. The scheme’s prudence is then paid out to the shareholders of the insurers.
And what happens to members when defined benefit schemes buy-out? Many schemes give members options to retire early and turn pension to tax-free cash on favorable terms. These options are part of the scheme’s liabilities and are included in the price of buy-out, but are members always protected when a new entity (typically a commercial insurer but maybe a superfund) takes on the management of the pensions in payment?
These issues are discussed by Hymans Robertson in their excellent Risk Transfer Report, published earlier this month (p.30 onwards for those with interest)
Take the new BSPS
The prudence in the funding position adopted by new BSPS when it was set up in 2018, is now being shared – to an extent – with members. This is an interesting precedent (in modern times). It’s a one off bonus, not a baked in increment to pensions (so there’s no impact on ongoing liabilities, but it will be a nice Easter present to pensioners who aren’t getting much else in the way of good financial news.
The £58m bonus will be paid out to around 50,000 of the 57,500 members with pensions in payment and former steelworkers will get it as a result of a deal struck to compensate for the loss of inflation-proofing of the scheme prior to April 1997. The loss only impacted pensioners at the time of the 2021 valuation (hence deferred members are excluded).
The loss of indexation has long been a grievance among BSPS pensioners, indeed prior to the 2017 changes , it was the principal grievance.
This is a vindication for pensioner action, in particular to that of Stefan Zaitschenko and his colleagues (pictured)
Stefan writes to his fellow pensioners
Each eligible member’s payment will take into account pension increases that would have been paid between2018 and 2021, had inflationary increases been provided on pensions earned before April 1997. Minimum payment of £250.Difficult to calculate – but this suggests an average payment of £1160.Trustees suggested this would be modest and it is. Indexation used to be RPI on all service so we have lost much more.Also, nothing has been said about what happens going forward. However, based on this action, I would expect another small lump sum at the buy out.
And herein we see a further unseen cost of buy-out which won’t get commented on as it should be.
Buying out the non-discretionary benefits lands insurers with the windfall of the prudence built into funding assumptions (which is now looking like surplus). This prudence becomes the insurer’s profits (which of course they misleadingly call “cost of capital”).
This means members (and especially older members) lose the chance of discretionary indexation, which might otherwise reappear… after the years of deficits.
There is no-one to protect the member here, not a sponsor (who wants shot of the scheme) or the Pensions Regulator, focused on protecting accrued pension promises, least of all the insurer – with the interests of its shareholder.
This is why we need to shift from a deficit to a surplus mindset, why we need more Stefan Zaitschenkos.