I am pleased to read from over the seas, this tweet

Gareth Thomas of DWP expects there will be changes to the draft DB Funding Code proposals, following industry feedback an open consultation.
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A consultation response from The Pensions Regulator is expected before Christmas.

— Josephine Cumbo (@JosephineCumbo) November 14, 2022

Much is made of the risk DB poses to corporate balance sheets – risks that have been locked down with outsize exposure to bonds through LDI. Not so much has been made of the cost of protecting the balance sheet, eye-watering deficit contributions to meet hy[er-inflated liabilities caused by under-size interest rates.

While pension funds could have participated in the global growth experienced by markets over the past ten years, they were required , by the Pension Scheme Act 2004 , to commit to gilts based strategies where the assets told trustees on the packet that they were buying negative real yield. The tragedy is a cash-flow tragedy. Now it looks like employers will need to find yet more cash to meet the hole in the pension scheme’s balance sheet since the LDI debacle. Another blow to the P/L. This is not a tragedy for DB members who are doubly protected by funding regulations and the PPF, it’s a tragedy for those who are not accruing and who have never accrued a DB benefit but are finding themselves in under-funded DC schemes.

The critics of CDC arrangements (well Royal Mail’s CDC arrangement) criticise it for creating potential intergenerational unfairnesses, but ignore the fact that older workers are getting x , while younger workers may be getting 1/4 x. A fraction as much cash per member comes out of the corporate bank account to meet DB liabilities as DC contributions.

So it’s good news to hear Gareth Thomas from the DWP thinking about the wider implications of the DB funding code. He is absolutely right, requiring pension schemes to hold cash to maintain LDI programs is the kind of luxury that businesses cannot afford now or in the future. These pounds going to fund pension liabilities using these uber-expensive strategies are pounds that are not going to paying the living wage, or investing in research and development or in finding new overseas markets for company’s products.

I don’t know if Mel Stride’s influence is already being felt or whether the DWP has finally woken up to what this blog has said countless times, but the landgrab for pensions that has persisted for nearly 20 years , has to stop. DB pensions cannot be so cash greedy, they must make more of their existing assets and be allowed to account for the growth in growth assets in their funding plans.

True, the horse has boulted for many schemes who are already lining up outside the insurers to get bought out. These schemes will get attractive buy-out prices for the remaining assets in the scheme but what is left after the LDI crisis , many schemes are only now finding out.

Watching XPS webinar on Innovation in Pension Scheme Strategy, where the recent #LDI pension crisis is being discussed.

Around a third of those watching the event said the hedges on their schemes had been reduced during the #LDI crisis, possibly exposing that scheme to losses.

— Josephine Cumbo (@JosephineCumbo) November 14, 2022

But there are many schemes who are still not ready to be bought out and many who see their business as paying pensions and have no intention to buy-out.

To hear that the DWP are listening to the calls of the pensioni industry to go back to the drawing board on the DWP funding code, is good news.

Now we have to start asking some hard questions as to the nature of the guarantees both fundamental and those imposed by scheme rules. There has to be some flexibility from both lawmakers and from members – an acceptance that the pension promises has to be balanced against other promises made to the workforce and to the customer.

Nowhere is this more pressing than in the public sector where the needs – most notably the need for salary  are being supressed to meet demands of scheme guarantees. The long-term settlement between younger and older workers , as determined by the reward strategies of those who control public sector finances, must now ask the questions of this blog.

Perhaps we can afford tomorrow’s, but we can’t afford them the way we account for these liabilities today. And maybe we should be asking people what they are prepared to pay for their guarantees and what compromise on pension security , they would accept , to return to real pay rises.