Yesterday I wrote about my fears that in the rush to pay for an insurer to buy-out their pension scheme, employers and trustees may be ignoring the interests and interest of members. The “interests” of members may be better served by transferring to a super trust with the promise of a profit share, or by staying in the existing scheme. The interest from members, whether waiting to pick up the pension, or in retirement , struggles to find a voice.
There exists within most occupational pension schemes a margin of funding that is there for “prudence”. Prudence has become more than a concept, it is an amount of money that can be realised by trustees to meet the worst case scenario, the possibility of a cash-call to pay pensions – which cannot be met by the existing assets of the scheme.
The amount of prudence within a pension scheme depends not just on the level of caution of the trustees but on the willingness of employers to fund it and the demands of the Pensions Regulator that it is there. This tri-partite of competing interests sees the trustees caught in the middle. Sartre described hell as three people in a room and that’s what funding negotiations feel like for many trustees.
But prudence is a very strong character and in the negotiations she has usually got her way. Many occupational schemes now find themselves not just properly funded, but super-funded and the question now is “who owns the prudence?”
Historically – prudence has been distributed to members through CETVs
At the height of QE with gilts yielding next to nothing and pension schemes investing ever greater amounts in “risk-free” assets, the discount rates used to calculate transfer value to member’s pension pots meant that members could receive more than 40 times their prospective pension as a cash sum. Within this huge amount was the prudence built into the scheme, which the member got a slice of – early.
But staying in the scheme, and seeing the scheme paying its prudence over to an insurer for little more than the bare minimum benefit is a bitter pill for members to swallow. They have chosen to stay in the scheme and that bet was made in the knowledge that if the employer failed, the scheme would go into the PPF. Are members being rewarded for their loyalty or are their interests being thought of at all?
Part of the trouble most members of occupational schemes have in this, is they are no longer part of the employer’s workforce, they are either retired or working for somebody else or “economically inactive ” – the polite way to describe people “out of work”.
Not only are these people not in the employer’s workforce, they are not represented by the employer’s union. The unions are yet to get to grips with a member’s right to his or her prudence. They appear to think that the battle for corporate pensions has been lost and that a “buy-out” is as much as most private sector DB members can expect.
The distribution of the surplus assets – the prudence – should be a a matter of great interest to members of private sector DB pensions, as should be their investment.
The temptation for trustees who find themselves in the luxurious position of choosing whether to buy out or defer buying-out is that they park the scheme in an investment lay-by where the scheme is fully locked down in non-productive assets with the engine on idle.
This is a good way of burning off a surplus but not a good way of looking after member’s interests. This is what is known as “reaching self-sufficiency” and it really isn’t much better than buying out and not distributing the surplus.
My hope is that we can open this debate now – and that we can ask questions of the schemes we are in , about whether the buy-out or the lay-by of self sufficiency, really is the best policy. Our great pension schemes were designed to pay pensions, not line the pockets of insurer’s management and those of their shareholder’s.