Trains that accelerate into termini, risk hitting the buffers

I’m pleased that the important SG Pensions conference this afternoon is now promoting its  subtitle “Challenges & Opportunities for DB Pension Schemes
in the New Environment”.

Defined benefit schemes are in rude health providing decent pensions to fire workers, teachers, medical workers, civil servants and people working in local government.

Even in the private sector there are substantial DB schemes still open for new accrual and indeed new members. These include high profile schemes such as USS and Railpen as well as a number of schemes in the not for profit and charitable sector. While not technically an occupational scheme, the PPF remains open to new schemes as does Clara, we hope that the Pension Superfund will join these superfund consolidators.

Many of these open schemes pursue pension strategies that have benefited from lower liability valuations and have not had to sell assets to meet margin calls, having eschewed LDI. The PPF’s Evan Guppy accepted at a recent Pension PlayPen event that in retrospect the PPF may have been better served deleveraging earlier.

Even if shorn of £500bn lost in the LDI fire sale, corporately sponsored DB schemes are reckoned to be well enough funded for the PPF to further reduce its levy as it itself hits a 138% funding ratio,

There’s a substantial proportion of working people in this country for whom DB is their chief means of improving  financial security in retirement.

So the title of the Conference is much better

Challenges & Opportunities for DB Pension Schemes
in the New Environment

What is the New Environment?

The new environment is one where we anticipate the cost of Government (and private) borrowing will be much higher than we’ve seen since the financial crisis. We are not only in a period of high inflation (hopefully temporary) but we are out of the era of quantitative easing (permanently).

Which means that the current valuations of liabilities are likely to remain a positive for DB funding.

The question facing DB schemes in this new environment is to what extent they need to keep in place the LDI arrangements that protect funds when yields decline and liability valuations rise. Can corporate DB schemes that relied on interest rate hedges for immunity to what is perceived as “interest rate risk”, change focus and start thinking about other risks instead.

There are other “unfashionable” risks to consider. One is the risk of making demands on a sponsoring employer which prevent the employer investing in its people, in new technology and in marketing itself and its products and services. This risk has largely been ignored over the past fifteen years as Regulators and consultant focus on scheme solvency to a point we now have the best protected pensions lifeboat , drifting in calm waters.

Another risk we think too little about is the risk that the great projects our nation is committed to , meeting the Paris Agreement, building Britain back better and Growing the Economy are stymied by under investment. Pension schemes can and should invest in the equity of the country, whether that be its infrastructure or its public and private enterprises. It has an environmental , social and governmental duty so to do – as recorded by the TCFD scorecard. Not meeting the targets we have set for ourselves creates much greater risks for generations to come, than the short term risks of not covering our pension  technical provisions

Finally, there is the deeply unfashionable risk that in facing up to the past, pension professionals have to admit that they have not got it right. This risk is local but it is a very powerful driver in maintaining  the status quo. Despite talk of “endgames”, the capacity of the insurers to buy-out pension liabilities is unlikely to be more than £50bn next year. Set against the total value of the UK’s corporate pension debt, that’s around 2%.

The longed for position of a solvent pension system has arrived. The train has pulled into the station. But the town we have arrived at is not yet built. For all the deficit contributions, the complex hedging strategies and the money spent on legal and investment advice, the trains just sit waiting to offload their passengers. It seems our arrival at the “endgame” is deeply anti-climactic.

Time to move on – or move back?

Trains can reverse out of stations and – once points have been switched – travel other paths. There are alternative ways to provide pensions than through an insurance company. There are other forms of pension than DB, future accrual into CDC schemes is a real possibility for some large pensions and we may yet see the rise of CDC mastertrusts for the smaller employers keen to provide pensions in a more benign environment than that promised by DB Funding Regulations and the Pension Regulators new DB code.

I will be chairing a conversation between one of the authors of the DWP’s Funding Regulations, the Head of Policy at TPR, the key practitioner in DB fiduciary management and the person responsible for much of the EU legislation that supports our financial system.

We are not at the terminus but at a station on the way to many other places, one station may be terminal – (buy out)-but people will still be needing pensions long after I and my other panellists have popped our clogs. The planet will still be in need of  T&C, society will still need the impact of pension scheme investment and we will still need pension as responsible asset owners ensuring that things are done right.

You can still register your interest to attend this event through this link.