The First test
At one point in yesterday’s parliamentary session on DB funding, a sharp MP likened the DP optimists to Ben Stokes “Baz ball” cricketers – gung-ho with news of current surpluses. This put Keating and Clacher in Australia’s “winning” position -as they took a more cautious approach to supposed surpluses.
It’s an odd comparison as the PLSA and LCP positions were based on numbers from the PPF and TPR – hardly the most dynamic of teams, maybe a case of the establishment getting carried on a wave of “irrational exuberance”.
To make sense of what went on in the first session of the Work and Pensions Committee’s inquiry into the current state of UK DB pensions we need definitive data and that may arrive today in the form of ONS numbers on the actual state of pensions to the end of 2022, taking into account much that has been missed in the PPF and TPR projections. I say “may” as there is increasing doubt about the reliability of private market valuations which appear to be defying gravity at the moment.
Steve Webb was at the meeting to promote a new way to fund DB schemes to issue further accrual and pay their own pensions (aka stay open). Keating and Clacher were at the meeting to point out that the current optimism was based on discount rates having risen from one or two percent to values in the four five and six percent range. Keating asked the Committee if it thought that the assets of schemes in many cases will not deliver returns to match, an assumption that could not be justified by the remaining asset base of DB pensions.
In practice, the two sides came together at the end of the meeting to agree that both sides wanted the same thing with “pensions being the winner”. In the high octane world generated by genuinely engaged MPs and some highly articulate speakers, it was left to the PLSA, Joe Dabrowski to play the umpire – while he did not speak for the regulator – he sounded like one!
We didn’t learn much new at the session other than LCP has evolved its thinking to include what it calls “super – levies” , an additional voluntary payment that can be paid to the PPF to ensure 100% protection in the event of sponsor failure. The super levy is an insurance premium akin to the ideas promoted by Brighton Rock, Con Keating’s proposed covenant insurer. Small wonder then that harmony broke out in the conclusion if not the early parts of the session.
There seemed to be universal support on the panel for LCP’s proposals, albeit at a high level. The PLSA called for a Government consultation.
The Second test
The second half of the morning’s oral evidence was given over to a discussion on what DB schemes can do to improve the pensions being paid to UK workers in the light of the greater optimism for DB pensions (whether grounded in fact or not).
If you have the chance to listen to this second session, I suggest you do. It’s characterized by a sharp dynamic between the Panglossian view that DB pensions are in the best place in the best possible world (John Ralfe’s view) and the view of other panelists that the current regulatory structure is unsuitable for a world that has moved on .
This latter view was eloquently expressed by First Actuarial’s Derek Benstead, Railpen’s Martin Hunter and the IFOA’s Leah Evans.
This session is characterized by the articulacy of all four participants , advocating two very different viewpoints.
It’s just not cricket?
Many people have given up on DB – certainly corporately funded DB – consigning it to the pensions legacy which will be dealt with by insurance companies converting pension promises into annuities.
The two hours of debate, which were hugely entertaining, very well argued and admirably supported by MPs who were well briefed, suggests that for 10.9m people in the UK who will get workplace DB pensions , the debate is anything but over.
The large open schemes – USS and Railpen, collectively make up a third by membership of future accrual in the corporate sector but the other two thirds still accruing cannot be ignored. While it is unlikely that we will see many schemes reopening for future accrual under the current regulations, there is a different paradigm , foreseen in this debate with a Pension Regulator operating to different objectives, with the PPF serving a different function and with the regulations around funding switching from discouraging to encouraging the accrual and payment of pensions.
None of these thing are here yet, they may never arrive, but they are now being openly discussed. Add to this , the avowed intent of both DWP and TPR to consider new ideas around risk sharing and the eventual arrival of CDC and we may consider the future a future with pensions and not just pots.
As for pensions Bazball, we can liken what we heard today to what is happening to test cricket. Test cricket has been brought back to life by the actions of a few forward looking and confident people , pensions may be following in the same direction. Thankfully, there is a healthy skepticism to counter the ebullience, both in cricket and in pensions!
On a day when we are likely to see our mortgages hiked again , it’s hard for many people saving into pensions to see ours as the best possible world.