Yesterday’s four hour Zoom Conference on the @Challenges & Opportunities for DB Pension Schemes in the New Environment” was unusual in having virtually no pension consultants and instead a large number of trustees and executives from DB pension schemes.
Far from presenting an orderly “acceleration to the endgame”, delegates discussed the difficulties they face as they jostle for the insurer’s attention. What is becoming clear is that there is little acceleration and that many schemes are either stuck in the buy-out queue or actively exploring alternatives.
Those in the queue for buy-out face a resource crunch
The insurers , with high demand and limited capacity can afford to be picky. We heard that prices are increasing for schemes who may be technically solvent but whose asset base has been eroded by recent margin calls and by the falls in value of their bond portfolios. We heard that schemes with illiquid assets are being sent to the back of the queue as are those with poor quality data. For the first time, I heard CIOs claiming that administration was under-valued.
The conference questioned whether there was enough talent in the pensions pool to supply the governance, investment decision making and administrative competence needed to maintain the status quo. Calls for consolidation into DB master trusts and the outsourcing of governance and investment decision making to corporate trustees and fiduciary managers were countered by those who saw the blow-up in LDI in resulting from group-think around solutions that excluded diversity and concentrated pension funds to a point that they became a danger to the nation’s finances.
Not enough has been done to challenge the status quo
And at the heart of the conversation was a sense of regret that more had not been done to challenge the status quo in the past fifteen years. Status-quo bias, a phrase that was introduced by yesterday’s Chair – Sally Bridgeland, translates into a “wish to keep things as they are”.
Change naturally invites risk, and people may be uncomfortable putting themselves in situations where the outcome is uncertain. This tendency to keep things the way they are can have a considerable effect on how people behave in virtually any aspect of life. In pensions – this natural conservatism has allowed the practice we call LDI to develop from a short-term tactic to an investment strategy.
In an exciting and challenging session, Baroness Sharon Bowles accused DWP and TPR of drafting regulations and codes that reinforced the status quo bias. TPR- through David Fairs – hit back by pointing to the innovation it was bringing through CDC, the DWP through Fiona Frobisher talked of the need for “creativity”. The mood in the audience, judging from comments in “chat” was that what we see by way of revised DB funding regulations needs to avoid status quo bias and accept fundamental challenge to the orthodoxy of marked to market valuations of pension scheme liabilities.
Financial risk and societal risk
The final theme of the conference was championed by a number of delegates who asked that we looked beyond the solvency issue to the broader picture of how pensions interact with society.
The societal risks include of course some financial risks, but were highlighted in the discussions on scheme funding. What does it profit society if pension schemes cannot invest in productive assets asked one delegate. Others questioned how pension schemes would react to the deluge of gilts being unloaded onto the market as the BOE embarks on quantitative tightening and the Treasury raises the money to meet the surge in borrowing.
And behind every conversation, the looming deadlines of the Paris Agreement, pledges to get schemes to net zero and concerns that actions aren’t speaking louder than words.
When the conference was asked who was the injured party of the LDI crisis, it did not point to consultants, trustees, sponsors or members – but to a societal concern – the injured party was the Government’s capacity to regulate.
This seemed the loudest message to the DWP and TPR. Pensions has wider considerations to think about than a responsibility not to fall into the PPF. The positive capacity of pensions to make a societal difference spoke louder than a desire to accelerate the endgame.
Again the orthodoxy that schemes should accelerate towards an endgame of “buy-out “was being challenged,
A conference without constraints
The value of this conference was that was said (either on the call itself or in chat) was coming from people who were unconstrained by the status quo. There were no consultancy firms or trade bodies wishing to maintain order. Which is why the conference felt different.
Left to get on with matters, DB pension schemes appear ready to face the future with a fresh intent. With buy-out currently running at 2% of liabilities per annum and with new market capacity (not least through superfunds) stifled, schemes look as if they are ready to challenge the status quo.
And with that, let us hope that their is space for the creativity and innovation that DWP and TPR want to encourage. We won’t have long to wait for the new funding regulations nor for TPR’s funding code which is expected to be in place this time next year.