Something rotten in the state of funding

Pangloss was a person who was optimistic whatever the circumstances, “all was for the best in the best possible worlds”. There has been irrational enthusiasm for the state of pension funding of late, that is panglossian.

By contrast, the parliamentary work and pensions committee are troubled.

They were troubled when the published this report and they will be even more troubled now they see that corporate DB plans have lost 1/3 of their asset base in a year – decades of investment and deficit contributions lost to supporting interest rate hedges.

They are calling for a radical reassessment of the Pension Regulator’s Defined Funding Code and with it the Combined Code .

Late last year , things had looked promising for the code

But the Christmas present won’t arrive till at earliest 2024 and with David Fairs no longer at the Pensions Regulator, enthusiasm for its measures are waning.

This is causing concern to those who have spent recent years trying to comply with the Pension Regulator’s strong nudges

As it leaves much of the advice that has been given to pension schemes apparently challenged


Why not take the Panglossian view?

It would be easy to sit back and watch the DB schemes that have been in troubled waters for so long, make it into the harbour and ready themselves to be bought out and their member’s benefits secured with annuities.

With inflation and gilt yields set to remain high for some time to come, you might have expected the Panglossian view to prevail and for people to settle down and wait for things to work out the way the funding code wants it. Schemes lock down assets, become self-sufficient of their sponsor and await a happy ending without recourse to the PPF.

But this is not likely to be . We read in today’s FT that the Government has other plans for public and private DB and the fast growing workplace DC “pension” sector.

The article makes clear that the Government’s regulatory trajectory is not to lockdown UK pensions but to encourage them to take more risk

Options to be set out in several government consultations include regulatory changes to encourage UK pension funds to invest more in riskier but potentially high-growth British assets, including early-stage companies, and to drive further consolidation of the country’s highly fragmented pensions market, said Whitehall insiders.

They added Hunt was “closely examining” a proposal by the Tony Blair Institute, a consultancy, to pool tens of thousands of public and private sector pension schemes into “GB superfunds” that would invest in UK start-ups, infrastructure and other companies.

This article has been criticised as  “yet another FT copy / paste of a UK Govt Press Relations announcement” 

But its authors are Jo Cumbo and George Parker who are never knowingly pushed around.

They quote the PLSA calling for  the breaks to be put on

“There have been some very radical proposals by various think-tanks on pension scheme consolidation and risk-taking in recent weeks,” said Nigel Peaple, director of policy and advocacy with the Pensions and Lifetime Savings Association, a trade body that represents workplace pension funds serving 30mn savers. “Many of these have not taken into account the realities of pension saving or the operational aspects of what is achievable. So if the government is planning to do a consultation exercise that would be very welcome.”

With only 18 months left of this Government’s tenure, such a consultation would undoubtedly mean that any measures would be voted through by another Government.

I suspect that this Government’s ambition is for a speedy implementation of its plans. The Government has decided that there’s something rotten in the state of pension funding. Its concluding it’s not about liability but about asset management.

The WPC are concerned about the risk reduction strategy known as LDI, which turned out to create more risk than it prevented. The Treasury is concerned with the risk reduction strategy that is requiring schemes to put money into Government Debt rather than into productive capital to drive UK Growth.

This amounts to the same thing. The Government is telling the pensions industry to move on and the pensions industry is not happy.

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 Something rotten in the state of funding

  1. Con Keating says:

    That HMT should deviate from promoting the purchase of the securities that it issues is telling us that something is very much awry in the state of Brexitland

  2. Robert Holford says:

    The noise around this is interesting but ultimately futile – the government already had pension schemes money or have they forgotten how much of the government gilt market is made up of DB and other pension schemes. Also for all the bitching going on about LDI the ultimate truth is that what it really enabled was for pension schemes to buy multiples more government debt than it could really afford. I suspect that if it keeps going in this direction the questionable benefits that forcing schemes to sell their government bonds and invest in the ‘UK business’ will be more than outweighed by the considerable increase in debt servicing costs it will experience when all this leverage is unwound. Turns out that while modern financial engineering allows a cerrain amount of temporal engineering to essence of the old adage, eventually is fundamental truth will alway shine through: you can’t have you cake and eat it too.

    • Robert Holford says:

      Apologies for the typos (apparently you can’t edit posts on this technology so for those I know will be annoyed by them) let’s try that again without them:

      The noise around this is interesting but ultimately futile – the government already has pension schemes’ money – or have they forgotten how much of the government gilt market is made up of DB and other pension schemes. Also, for all the bitching going on about LDI, the ultimate truth is that what it really enabled was for pension schemes to buy multiples more government debt than they could really afford. I suspect that if it keeps going in this direction the questionable benefits that forcing schemes to sell their government bonds and invest in the ‘UK business’ will be more than outweighed by the considerable increase in debt servicing costs the government (and by extension all of our tax pounds) will experience when all this leverage is unwound. Turns out that while modern financial services allows a cerrain amount of ‘temporal engineering’ to the essence of the old adage, eventually its fundamental truth will shine through: you can’t have your cake and eat it too.

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