Yesterday we had our conference – thanks DG for your DB Strategic Investment Forum. 85 pension leaders gathered at what a jealous non-invitee tagged the “poor man’s Gleneagles”. It is the most luxurious experience of my year and as I was speaking , I did not feel too guilty to be being entertained by our well-heeled sponsors
The event was under Chatham House and I’ve given permission to me to report what I said.
I spoke to the subject of the “future of DB”. About a third of the 85 delegates were representing the LGPS which has proved itself a resilient funded pension system which takes 25%-30% of payroll as an ongoing pension contribution and gives members a pension paid with full inflation linking. On average it is around 120% funded and has an indefinite future. One delegate warned me that when things look this rosey, Government has a habit of taking pension risk onto its balance sheet, together with the assets. This looks far-fetched – though it did happen recently at Royal Mail. Despite this ripple, the future of DB pensions at LGPS and for the unfunded public sector pensions (not at this conference) looks secure.
Several delegates I spoke to said that the sponsors of the schemes they ran saw themselves in an “endgame”.
The question they were asking was “does this mean the end for the pension scheme- or just the employer’s support for it”.
Where the scheme is being groomed for buy-out, then the intention is clearly to wind-up the pension scheme and handing over the assets in return for annuities paid to former members by insurers. Clearly this would mark the end of the DB occupational Pension and were buy-out to become the default option , I would suggest that Corporate DB pensions have very little future.
The conference organisers and conference chair Ian McKinlay had left a session open to speak on “alternative funding options” that might keep DB pension schemes going with or without their sponsor.
I presented two options that might be considered – alternatives!
Clutched from the jaws of the PPF.
There are always companies in trouble whose weakness comes to the attention of the Pensions Regulator and the Pension Protection Fund because they sponsor a DB plan. Examples include Wilko, CBI, Thames Water and Debenhams.
While a fan of the PPF, it is not a defined benefit occupational pension scheme. It has elements of CDC about it (in can cut benefits where necessary). So DB schemes that go into the PPF have no future as DB pensions schemes. As with buy-out , the member is still secured a pension but not the pension they might have hoped for.
Instead of giving up the ghost, DB schemes can pursue outside help. There is at least one organisation prepared to put forward an additional sponsor where the existing sponsor is considered too weak, that sponsor being backed by capital. Where the additional sponsor is onboard, it’s like a second engine pulling the train, the steep gradients become a lot easier, schemes can invest tor the future – rather than lockdown into gilts and pay-back for the additional sponsor, comes at some point down the line, where surplus can be extracted. These arrangements offer limited upside for members through bonuses awarded by trustees when funding targets are exceeded.
Handing on the baton
Passing on the baton of sponsorship to a new employer is not as hard as it sounds (so long as a new sponsor is happy to take on the scheme’s liabilities).
For the past five years , we’ve assumed that this is what Superfunds would be doing. Unfortunately, the superfunds can’t find a way to work under current regulations so no deals are being done.
But rather than giving up, they are looking to the capital backed journey plan (a well trodden path) mentioned above, not just as a means to keep schemes out of the PPF but as a way to allow less distressed sponsors to hand on the baton in a comfortable way.
The mechanism for this to happen is a simple swap of sponsorship and this can be achieved within a DB master trust structure, as the alternative to the superfund. Again this could be a bridge to buy-out or a longer term approach where the new sponsor undertakes to pay the pensions for as long as their are pensioners.
Working with what we’ve got.
Although there is a chance of a Pensions Bill in the Kings Speech on November 7th, I have no expectations that it will make superfunds, CDC, pot consolidation, default DC pensions or the Value for Money framework, a reality within the next few years. Years after the Pension Schemes Act, we have yet to see one penny paid into the Royal Mail Corporate (CDC) plan. The Pensions Dashboard, another protégé of PSA 21 is still in extended gestation, the new powers of the Pensions Regulator have yet to result in an agreed version of the DB funding code.
The message is clear, whatever comes from government will take a decade to deliver. We must get on with life in the meantime, making the best of what we can.
LGPS is in rude health, other public sector schemes less so but continue to have the support of the Treasury. Corporate DB plans will have to innovate or face buy-out. Some will continue under their own scheme (Railpen, USS) but most will come under increasing pressure from sponsors who want out.
My short contribution to the debate was to offer schemes with expectant sponsors, an opportunity to hand over the baton to a new breed of commercial sponsor , fired with the zeal of the social entrepreneurs who set the DB system up in the first place.