Time for a “reset” on the DB funding code?

Sid got quite excited about shares - for a bit.


Whatever happened to our shareholder democracy?

Back in the day, Britain aspired to have a shareholding democracy. We were to own little slices of the companies nationalised in the 1980s and our ownership would mean that Sid and all the people who he bumped into on his bike, would be part of regenerating Britain.

But direct ownership of shares never really caught on.  People learned to buy shares at a discount and sell them back to make a quick profit. Some people held shares in BT, British Gas and the other Government share issues of the 1980s but most of us (luckily) didn’t.

Much of the energy utilities and telecoms are now owned by overseas companies and the idea of “British” persists mainly in the titles of defined benefit pension schemes. Though they are nominally British, these schemes are only invested 2-3% in the British stock market.

Even our workplace pensions – into which we are saving through auto-enrolment,are not invested in the British Stock market deliberately, most of the allocation to UK Equity is because it still forms a diminishing market weight of global indices. We invest in our country accidentally and with no intent to improve our society. Some DC defaults now operate “de-risking from equities as much as 25 years from the target date of retirement”.

This is taken from this morning’s FT

Sir Douglas Flint, chair of asset manager Abrdn, said money going into UK equities was declining because the amount flowing into defined contribution schemes was “significantly below” the amount that historically went into the defined benefit schemes they have largely replaced. “Defined contribution schemes are also cautious on risk, so another reason why there’s not much going into UK equities,”

Only in the funded part of public sector schemes is there a coherent social strategy to invest in the UK. Here local authorities are looking to invest locally as part of the Government’s levelling up agenda and though this goes slowly, it does show some attempt to link pension investment to the communities the pensions serve.

Is the money in our pensions “our money”.

In recent work with the SEI master trust, Janette Weir called for greater ownership of pensions by those who held pots of money destined to pay for their retirement.

In truth, very few of us could say what our pension contributions owned by way of individual investments and we’d probably be shocked when the list of investments that have been made on our behalf was read out to us.

Frankly I don’t know myself, other than I don’t own stocks that invest in fossil fuels, I simply look from time to time at the value of my pot and hope that we don’t have another year like 2022.

However , I do own what the money is going to do for me. It will pay off my mortgage and it will provide me with an income that will allow me to do what I want with my later years.

The money is my money because I know how to spend it, I even know the process by which I can withdraw money if I need to. Sad to say, I have no confidence in my capacity to turn pot to pension – other than buying an annuity – which I may end up doing if something better doesn’t turn up (I think I speak for many people in this).

But I cannot say I am “engaged” in my pension as I am engaged in my businesses or my property or the future of my family or the Church I am a member of. There is nothing that excites me about my pension pot.

Can Sid be helped?

Sid today does not own shares directly, he holds them in his workplace pension pot. If he has a right to a DB pension he may have a little bit of the equity of UK plc backing his pension but in truth, most of Sid’s money is tied up in Sid’s house, in cash ISAs and his pension money is increasingly in bonds and cash as his pensions “de-risk”.

Sid, like UK pensions is heading for an end-game – either “cash-out ” or “buy-out”.

There are people speaking out against this.  Yesterday Legal and General reported that “LDI carnage” had wiped £119bn off its funds under management. Citywire quote Terry (Fundsmith) Smith asking a simple question

Fund manager Terry Smith tore into LDI strategies,  saying the concept of adding leverage to increase exposure to gilts through derivative contracts was destined to come unstuck at some point.

‘This approach is flawed. Why not try to invest in assets that should produce a higher return than gilts over the long term, such as equities?’ Smith said.

Meanwhile , Nigel Wilson, CEO of L&G  is reported in the FT lamenting the  ‘drift’ away from London’s equity market.

Newton and Jupiter are – like Grendel- resurfacing to call for pension scheme rules (the DB funding code) to be relaxed

For like Sid with his shares, pensions have drifted away not just from investing in the UK equity market but equities in general.

Over the past decade to 2021, UK corporates have made £263 billion of ‘special contributions’ to their DB pension funds

All of which and more has been lost by pension funds, under the ‘guidance’ of tPR, investing into gilts and LDI

As they invested into productive assets, either directly or via the pension funds, UK plc would have doubled its investment.

Edi Truell calls this  “a scandal of national importance“.

Time for another reset?

The Pension Minister had the guts last week to pull the timetable for the launch of the pension dashboard , recognising that the DWP was failing to deliver. She called for a reset.

In the meantime, the calamity of what has happened to our DB schemes is becoming clear.

Isn’t it time Laura Trott called for a reset on the DWP’s pension funding regulations and the Pension Regulator’s DB funding code?


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Time for a “reset” on the DB funding code?

  1. Jnamdoc says:

    Like the dangerous speedy drivers leaving a trail of mayhem behind them, the DB world will not recognise the calamity that ‘happens’ to be around it.

    Again, at a recent industry event I was dismayed by the number of consultants and trustees (mostly of the independent professional hue – so with no connection to actual member stories or sponsors) who proudly, it seemed, trotted out the “but we are only following the rules” line when challenged about the calamitous effect the wholescale withdrawal of “investment” by DB schemes was having and would have on the economy.

    I applaud SEI’s attempt to invigorate some sense of ownership over DC pots, as the current reality of AE DC is that the large institutions (openly) see their business model as being one of asset gathering and scale, rather than as previously the case when they were venerated for their investment nous and returns.

    All in it together, means we need to investment and have trust.

  2. henry tapper says:

    Thanks @jnamdoc . Of course people should emotionally engage with their savings – but it’s damned hard if you have to make choices about them you don’t properly understand. Longevity – tax – market returns – inflation – blimey! We are asking people to take on so much responsibility for their DC pots and giving them so little help. I don’t feel I know what I should be doing next – let’s hope that we get a “done for us” solution that doesn’t involve cashing out , investing in gilts for the next 30 years or chancing it with drawdown!

  3. Dr Robin Rowles says:

    In the 10 years that I was a director of the Trustee Company that managed the Company DB Penson scheme and it’s funds, the Investment Manager more than doubled the value of the funds under investment (OK some of that was new money of course). The Trustee board was made up of equal numbers of employee reps and main board reps plus, latterly, an independent trustee who frankly was useless and hadn’t even bothered to read the Trust Deed (we subesequently learned from their actions). Strangely, when LDI came along we were advised not to touch it with the proverbial “barge pole”, so we didn’t. We weren’t very impressed with private equity companies either but I guess that is another story…

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