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.
