Key commentary on pension funding that can’t go unread!

I have a rare day to myself, Lady Lucy is resting up rather than take on Hurricane Nigel, my family are dispersed and I have had a lie-in. I’ve also spent some time this morning catching up on comments on this blog and in particular a debate between regular contributors Allan Martin, Jnamdoc, Byron McKeeby and Con Keating.

The comments are as good as the blogs and well worth bringing to your attention.

I had written that Liz Truss would cut pensions paid and force “hard working” people to work beyond their sell by date (pension gulags). But Allan Martin rightly points out that we would only have to do that if Britain cannot grow its economy.

Allan  asks if we can afford our public sector pension promises

Liz Truss is right that the UK needs growth to pay for the state pension “triple lock” but also to pay for the “lifetime pensions lock” on £2tn+ of index linked unfunded public sector pension promises, our “other National Debt”. Pensions for 5m+ teachers, NHS staff, police, firefighters, the armed services and civil servants are hugely deserved, not just for those coming off night shift as we read.

The SCAPE (Superannuation Contributions Adjusted for Past Experience) discount rate (used to calculate benefits and contributions and retirement ages) has been reduced from CPI+2.4% to CPI+1.7% pa (H M Treasury – 30th March 2023). I suggest it is the most unappreciated but important actuarial assumption in the country.

The public sector benefits were previously promised assuming real GDP growth of 3.5 – 2.4% pa. GDP growth at such rates hasn’t been achieved since the 2008-09 financial crisis and we have of course had Brexit, C19 and the war in Ukraine affecting actual and prospective growth. This suggests a consequential and massive intergenerational transfer of liability to future taxpayers – you, your children and grandchildren (if they don’t emigrate).

£2.1tn of index linked pension promises assuming GDP growth averaging CPI+3%, that 3% average real growth assumed, minus 1.7% now expected, every year over say 35 years on a (2020) liability of £2.1tn suggests the biggest DB deficit admission in UK pensions history; ~£500bn? Does this prompt an arithmetic comparison to a Ponzi scheme?

Dr Byron McKeeby, that grave farmer whose image we all recognise as the archetype for American Gothic, has a different take on Liz Truss’ pension interventions.

What Ms Truss knows about pensions may either come from special advisers or civil servants who briefed her, or from her hazy knowledge of flawed accounting standards, as she was one in a former life.

Will MPs and/or former ministers change the terms of their own “gold plated” pensions? Probably not.

To which Jnamdoc, a protégée of Byron’s comments on criticism of Truss made by Mark Carney, former Governor of the Bank of England (while LDI brewed). He had Liz Truss wanting to establish Britain as Argentina by the sea.

LOL – you gotta admire the chutzpah of Carney.

Its a bit like John Pierpont (J.P.) Morgan owner of the White Star Line, blaming the lifeboat crew of the Titanic!

TPR induced LDI gave rise to an inevitable systemic failure of the lending and financial system (requiring immediate BoE intervention) through the use of uncontrolled and unmeasured financial leverage over the preceding decade – did Mr Carney have not responsibility for the banking system or financial stability?

The Argentinian reference is more scapegoating and an attempt to appear prescient about something I’d mentioned a few months ago, and which falls into the range of increasingly likely probable outcomes.

In the early noughties Argentina nationalised its commercial insurers (for not doing an efficient job on pensions, say). Under our TPR induced model, the insurers end up holding a predominance of gilts, effectively acting as a clearing house channelling cash from Govt (ie the gilts) in administering the payment of pension to DB members. At some stage (will?) UK Govt will see the merits of cutting out the middlemen (and their insurer profit) and paying the pensions (bringing them under direct control) directly?

We do not have any moral or intellectual superiority over the Argentinians (or any other State busted by truly a appalling lack of policy or Regulatory oversight). Its just a question and the consequence of financial economic and politics…

This week also saw a long blog from Con Keating and Iain Clacher criticising the PPF for failing to adapt their pension fund to the circumstance in which it found itself and instead looking to expand its activities to become a commercial pension consolidator.

I had pre-published a complaint from the pair that the TPR and PPF’s assessment in the collapse of DB asset valuations in 2022 was a woeful underestimate , when compared with their own work and that of the Office of National Statistics – which provide a quite different (and much worse) story. Con Keating commented on his blog to clarify

As I have had a few emails on this – an addition
On the anniversary of the LDI crisis, it is worth looking at how the world of LDI has changed. Between the end of December 2021 and March 2023, leverage actually increased from 11.2% to 12.5% of scheme assets. Repo declined in nominal terms from £194 billion to £123 billion, 36.6%. While Pooled LDI fund exposure fell from £231 billion to £168 billion in nominal terms, 27.3%. As a proportion of liabilities in December 2021 these pooled funds were 12.5% and they are now 13.5%.

We would like to think that instead of talking about how “well-funded” schemes are, that TPR would be looking at this – it is what got us into this terrible position in the first place.

As for PPF, before chasing a role as a pension consolidator, it seems sensible for them to resolve this major discrepancy in asset values as it has serious implications for their credibility in terms of the quality of their risk management.

As for the more substantive (nearly 10,000 word , refutation of the PPF’s arguments to be a consolidator, positions are polarising.

I understand that the PPF have called a meeting with Clacher and Keating to discuss this further. The Chief Actuary of the PPF is appearing at the Pension PlayPen in weeks to come and at an SG Conference on October 5th. We look forward to hearing his reply.

They might also wants to discuss Byron’s comment on the current investment strategy of the PPF.

The authors point out that the PPF became “cash flow negative” during 2022/23 for the first time.

But surely one reason for that is the very low investment income yield PPF has (always) earned on its assets.

PPF started the year with £39 billions of assets (a value which had fallen by year-end to £33 billions) and yet generated only £674.9m of investment income during the year, a yield of 1.7%.

And Con Keating’s reply

Indeed, the yield was 1.7% and the surprising thing was that this was down from the £813 million from an opening £42.5 billion of assets, a yield of 1.9%

An hour well spent

Hurricane Nigel is hardly ripping up Berkshire but the guests on Lady Lucy clearly thought it might – hence this chance to catch up. It’s been an hour well spent.

I love all the comments on my blog and sorry to John M, Martin T and Dave C for not getting to you. 

The debate on my blog does get read and does make a difference. The Chair of TPR once told me that she shared these articles and comments with people applying to senior positions for their comment. They form part of an informed debate that while not mainstream, is valued at the margin.

It was an hour well spent reading these comments and several hours well spent constructing them. Thank you.

Nigel and Sheila –  Torbillie under cover – also fled the eponymous storm!


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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