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.
Stefan
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.
There is more to “de-risking” in pensions than making the investment return more certain or the pension balance sheet more stable. Neither of these objectives are as important as making the benefits more likely to be paid in full. And actions aimed at making the investment return more certain or stabilising the balance sheet may make it less likely that the benefits are paid in full. It is a curious “de-risking” which leaves members exposed to risk of high inflation.
“A shift from a deficit to a surplus mindset”. Now there’s an interesting phrase. Private sector pension schemes are required by legislation to be prudently funded, which is generally taken to mean they must plan to have more money than they actually think they need. A scheme which is in deficit against its prudent funding target may actually be in surplus relative to a best estimate of its needs.
There is no reason why the PPF should not provide pension increases on pensions accrued before 1997, if the scheme provided increases on pre-97 benefits. The scheme has (prudently) funded for these increases. It’s a major weakness of the PPF.
And pensioners are exposed to risks of high inflation; https://ifs.org.uk/publications/16006
“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.”
The BSPS2 Trustee’s intention is for a buy-out of the Scheme. Are you suggesting this isn’t particularly a good thing for members and there’s better alternatives? I would like to think that the Trustee is doing all it can to get the best possible deal for the Scheme and its members?
Your blog is written as a tribute to Stefan Zaitschenko……well deserved I say! He shares a wealth of knowledge, expertise and dedication on the BSPS2 Facebook Group.
When trustees transfer risks at buy-out , there is potential to increase the support the scheme gets. Few employers can match the financial strength of an insurance company. But there are latent opportunities open to trustees which can get lost. I know that you have the chance to e-meet your trustees soon and suggest you ask them whether they have considered the upside to members of keeping the scheme under its current governance structure.
Thanks Henry.
Had a look on the BSPS2 website and there’s a facility there to send any questions in advance for the ‘Online Member Event’ which takes place on 27-04-2022 and runs from 1:00pm through to 2:40pm. It also says….”We can’t say that all questions can be answered on the day, but we will look to pick out the most popular questions being asked.”
I have asked in advance what you have suggested…..I wonder if this will be one of the popular questions?
With regards to a buy-out, apparently this will provide the same benefits as the Scheme or better? Also, there have been concerns about the Scheme falling into the PPF if Tata were no longer Sponsor? Can I ask what your views are on this?
Stefan is a gent, he went to my college and though we never met there, we had plenty of conversations around the time to choose. He keeps a tight ship of that Facebook group and won’t brook nonsense – I have nothing but respect for him.
Hear, hear!
Kind words, Henry.
I cannot be sure if our letters and submission to consultative committee members had any influence on the Trustees decision to promise a restoration payment after the triennial audit. I am just pleased that they honoured their commitment. The Pensions Regulator and Trustee also stated that any surplus at the time of buyout should be used only for the benefit of members. So several years in the future, if the assets are above 103% at Buyout level, we should expect another payment or higher pension benefits from the surplus available at BuyOut.
I still hold onto a hope that the Trustee/tPR/PPF would allow a strong low risk BSPS2 to continue without a sponsor as a Zombie scheme with a potential increase in benefits.
It seems, having come so far, that BSPS is a survivor Stefan! Like the coal-workers scheme , it has the potential to do much good – and it still has one of the best investment management teams in the country. Regards to you
Stefan and Henry,
From what you’ve both said, it appears that members would be best served if BSPS2 was allowed to continue without a sponsor as a ‘stand alone’ or ‘zombie’ Scheme, instead of the benefits being secured with an insurance company (buy-out).
However, this doesn’t seem likely after reading the recent BSPS2 News Brief (March 2022) in which the message from the Trustee Chairman includes…..
“Over time (as the Scheme matures), the BSPS funding level is expected to improve further and ultimately reach 103% on the ‘buy-out’ basis. If and when that happens, benefits are expected to be secured with one or more insurance companies, and the 3% surplus will be used to increase members’ benefits in accordance with the provisions agreed when the new BSPS was established. Achieving the funding level to trigger this additional payment to members and secure their benefits remains the key priority for the Trustee.”
“Another Trustee priority is to ensure that benefits are paid in full and on time, not just today but into the future. This means that the Trustee needs to manage the risks facing the Scheme and do whatever it can to protect members. With this in mind, at the end of 2021 the Trustee entered into a policy with Legal & General (known as a buy-in) under which around 5% of liabilities were insured. This does not affect the benefit entitlements or security of benefits of any member. The buy-in policy is held as a long-term investment.”
“Entering into the buy-in policy means that Legal & General is now a data controller in relation to the Scheme and their privacy statement can be found on the Scheme website, http://www.bspspensions.com. The Scheme’s own privacy statement has also been updated and can be found on the website too.”
Whichever way it goes, I hope the best outcome is achieved for the Scheme and its members….fingers crossed 🤞