DB surpluses are not “the golden opportunity” of the Mansion House reforms.

WTW (as we now must call Willis Towers Watson) have identified the use of surplus as conclusive to the WTW perspective ( a four page PDF which finishes with this call to action).

It would have been as unimaginable for this to have been written two years ago as for the LDI crisis to have been foreseen a year later. The problem with surpluses today, is that they are not supported by the assets of yesterday. Liquidity is still in short supply , even in well funded schemes and while collateral calls are now being met, these surpluses have been created at a high price. They exist because of current gilt yields and could evaporate as suddenly as did liquidity in 2022.

The problem with “member’s broader interests” (article 6) is they are increasingly unaligned with the interests of a scheme sponsor. DB members are increasingly pensioners and therefore at the top of the PPF’s priority order – so unlikely to lose out from corporate failure. Deferred pensioners have typically moved on – and while they should be concerned about the sponsor covenant, should be as concerned about the sponsor’s intentions with their funding buffer. There are relatively few in the managerial sections of sponsors, who are in the sponsor’s DB scheme. The “member’s broader interest” is probably not the same as the employer’s shareholders or other stakeholders.

They do mean that some of the funding plans , agreed between TPR and trustees can be revisited and that could mean less immediate strain on corporate P/L, but there is a real risk that corporate employers are being allowed to consider pension schemes as an immediate opportunity to resolve corporate solvency.

It is well to remember that the Mansion House Reforms, which WTW regard as a “golden opportunity” were announced within 9 months of the LDI crisis. The business of providing pensions is measured over decades not months and the idea that surpluses should be shared at all is precipitative.

I  suggest that WTW would  better to relegate a discussion on surplus distribution to  “tactics” rather than risk it being interpreted as “the golden opportunity” itself.

Surpluses when they arise are fragile and vulnerable to opportunism. Pension strategy should not be driven by opportunism and should be mindful of the long-term capacity of a scheme to meet its pension obligations. The loss of assets in 2022 should be of more concern to trustees than the fall in liabilities – as calculated by means of a contentious discount rate.

There is so much to like in what WTW are saying elsewhere, but look what the pension headlines actually are.

Look back 30 years and we were having precisely the same arguments around schemes like Lucas Industries. 

The issues remain the same and while WTW’s proposals may differ slightly from those of Professor Goode, we haven’t moved far in three decades, deficits and surpluses will always be with us, so long as we account for pensions on a mark to market basis.

It is worth noting in passing , that the FABI index has recorded a pretty consistent surplus in DB funding over the past seven years. Moving funding to a best estimate basis would help move the discussion beyond boom or bust and refocus discussions on strategic matters.

The First Actuarial Best Estimates Index shows consistent aggregate funding and surplus levels for the PPF 7000 schemes through boom and bust.

We cannot allow the short-term tactical decisions around surplus apportionment to be confused with the opportunity to create out of the history of DB, the present of DC and the future of CDC, a re-structured  pensions system which offers a coherent picture to the confused consumer.

Why WTW and the other major consultancies are so important in this, is that they have the ear of the large employers and trustees who ultimately decide on the success or failure of the Mansion House Reforms.

These reforms will take years if not decades to deliver better pensions and greater growth in the economy. By the time the dividends of implementation are reaped, we will have been through multiple cycles of boom and bust in pension funding (assuming we continue to mark liabilities to market). The benefits of investing long-term have to override the short -term advantages of de-risking. Surplus extraction cannot be considered “cream-skimming” in good times. That is how the famine and feast volatility is amplified.

It is  important that the pension consultancies keep their eye on the “golden opportunity” and not go chasing down rabbit-holes, after illusionary surpluses.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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10 Responses to DB surpluses are not “the golden opportunity” of the Mansion House reforms.

  1. jnamdoc says:

    What if instead of surplus, we call it systemic overfunding (as you identified years ago via the FASB index)?
    I’m not sure it helps to say the any surplus is fragile and will be stolen? It just feeds into the whole “derisking” narrative used to frighten and marshals older people ( ie DB members) into over cautious over funded solutions, that does nothing to increase or protect their pensions, at the expense of the broader economy?

  2. Henry heskeh tapper says:

    That is pretty well what I’m trying to say- though I hadn’t considered mark to market as part of “project fear”. There has to be a policy on surplus but we seem to be fixated on it right now

  3. jnamdoc says:

    It wasn’t too long ago (in ‘pension years’) that surpluses were seen as a bad thing and HMRC policy effectively limited over funding (was it limited to 110-115%?).

    It’s important and right to be having this debate about the use of overfunding. Should it sit in the bank (earning the bankers a safe fee) for a rainy day for the few, or used to fix the roof now of our leaky economy for the more common good?

  4. jonspainwp says:

    From 1997 until 2006, tax-free surpluses were limited to 5% but assets AND lianilities were assessed under prescribed long-term assumptions, not linked to current gilt yields. Actually, the whole discount process is the problem, not the solution. Among many other things (see http://www.discrate.com), a single-value process fails to indicate the lack of liquidity over time, happy to chat.

  5. con keating says:

    The Lawson limitation was to 105%. We have seen sponsors required to pay in some £300 billion in deficit repair contributions and inflated ordinary contributions over the past 20 years – it is only equitable that this should be returned to those sponsors before considering a scheme to be in surplus.
    There is substantial evidence that these contributions restricted the amount of investment by sponsors over these decades.
    As at year end the ONS reported scheme assets to be £179 billion lower than the PPF and TPR figures – just £1230 billion. We expect the ONS survey March 2023 figures late this month – and that looks likely to disagree even more widely (estimated to be a little under £200 billion) from the PPF and TPR estimates of £1440 and £1425 billion. The December correction would show scheme funding of 102.8% not the 115.1% of TPR or 136.4% of the PPF. That calculation uses TPR’s estimate of liabilities, as ONS does not yet publish pension liability values – we may see some experimental first estimates of those in the release this month.

  6. PensionsOldie says:

    You are correct about the use of best estimate rather than gilts based mark to market valuations when thinking about DB pension scheme surpluses. The present surpluses on gilt based mark to market valuation are likely to be as misleading as the deficits of previous years and are equally likely to lead to decisions that are not in the interest of the members over their lifetime.
    I expect schemes now reporting surpluses would report even larger surpluses on a best estimate basis, indicating that they have been over-funded and real value benefits restricted (e.g. by the application of inflation caps) unnecessarily. In that situation is it not better for the scheme to run on with the capacity to first correct the benefit restrictions and then to consider a release of surplus on a controlled basis back to the employer over a period of time to offset the pension costs of current employees. This intergenerational subsidy occurs naturally in an open pooled risk DB Scheme.
    A surplus, appropriately measured against the scheme’s actual and projected cash flows including dividend reinvestment and any required sale of investments, could then be released to the employer over a multi-year “Surplus Distribution Plan” as a mirror of the Deficit Recovery Plans employer’s have had to contend with in the past. As with the deficit recovery plans, the surplus distribution plan can be amended going forward to reflect changed circumstances. I would suggest a minimum duration of 9 years (3 valuation cycles) for a surplus distribution plan with front end loading discouraged by TPR oversight.
    If the distribution to the employer was taxed in the same way as relief was given to the deficit contributions this would encourage employers to support the scheme by maintaining its guarantee to the benefit of the Members. This would contrast to any windfall surplus paid over to an employer who has extinguished its guarantee by encouraging a high cost buy-out which leaves no opportunity to maintain the real value of the pension benefit to the members reflecting past or future inflation. Such a windfall gain should then be taxed at a (the present) higher rate of tax.
    In this way DB pension schemes’ assets would continue to be invested for long term income generation (either in the closed scheme or in the replacement DC or preferably CDC arrangements). What we do perhaps need is a consolidation vehicle for smaller schemes that allows the employer to continue to guarantee the scheme while investment can be made on a collective basis (as happens in the LGPS).

    • PensionsOldie says:

      Sorry I realise I need to make two qualifications;
      . The comment about schemes reporting larger surpluses under best estimate valuations applies to schemes who are not pursuing an LDI strategy.
      The oversight of the TPR assumes the objective of TPR is changed to seek to protect the value of pension benefits over the lifetime of the Member.

    • jnamdoc says:

      PensionsOldie – everything you say is succinct and eminently sensible. It’s like a manifesto for sensible pension policy. You probably are not therefore, but should be, involved in Gov’t Pension Policy!

      The whole discount rate de-risking debacle is a product of an unfettered Regulator’s approach to the challenge (of providing a aged living wage) with an insurer’s mindset. And it is has failed.

      Ostensibly, the purpose of the PPF was to serve as the lifeboat of last resort for failed private schemes, but crucially to do so independent of Govt and to reduced (or placed no) risk on the UK tax payer.

      But 20 years under myopic TPR thinking (to protect the PPF, forgetting its purpose, i.e. the PPF’s’ was actually to protect the taxpayer) most UK private sector pensions will now be paid for by the UK-tax payers in servicing a truly colossal level of gilt issuance held by schemes (c£1trn).

      So, we may have de-risked for the insurers (now scooping up over funded schemes) and the PPF, but we have totally totally fully risked the tax-payer.

      Just bizarre .

  7. David McNeice says:

    I’m not sure that opinion publications from the likes of WTW carry as much weight as they used to.

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