William McGrath and TC Jefferson have released a campaign statement for 2024 that rolls like this
As we enter a new year. it is indeed time to review DB pension strategies. Yields may not remain higher for ever but there is now sufficient confidence in pension scheme funding levels for the senior executives of many sponsoring employers to get their feet out of the wet cement of institutional rigidity and cease to regard their DB schemes as a quiet graveyard.
McGrath is calling for his peers to consider the DB scheme as an opportunity not an albatross
A pension schemes as an asset not an albatross
My original strap for this blog stated that run-on was a new way to manage DB schemes. Many young practitioners have joined the pensions industry over the past 20 years when the only way for DB schemes to be funded was as a “bridge to buy-out” or at best as “self-sufficient from sponsors”,
It is not a new notion at all. Throughout the post war years and right up to the turn of this century, DB schemes were considered an asset of a company and something that boardrooms could feel pride in creating.
The prolonged repression of interest rates following the 2008 financial crisis let to the creation of leveraged LDI strategies, which allowed pension schemes to borrow money on the capital markets to artificially boost returns and keep at arms length a regulator intent on supressing risk-taking to protect the pension protection fund.
The price to pay for this risk-aversion was a huge sum of money paid collectively against deficits that were created by the tyranny of discount rates linked to the depressed cost of Government borrowing
But the events of 2022 changed that. The borrowed money had to be repaid in huge collateral calls that required the assets that had been hard-bought to be sold in a hurry.
While the notional deficits disappeared, this was a function of actuarial science and financial economics , not the real world valuation of assets within the schemes. The assets within DB pension schemes fell by a massive £600bn in 2022, making the platform for a real recovery in DB pension schemes a lot smaller.
The mood music coming from the main boards of many of our largest UK companies has turned from the immediate euphoria of seeing schemes return to notional solvency to a deep resentment that this has been achieved at such cost.
The assets of the great pension schemes are now materially reduced from where they were and with large cash buffers now in place to hedge schemes against current interest rates falling, many schemes have no alternative to buy-out. Indeed the clamour to get to the insurers before “higher” is no more, is deafening.
Surely this is no way to run a pension system?
There is an alternative. McGrath , like Edi Truell, sees the future of DB pension schemes as a means for pension schemes to pay pensions into the future. Those who have come into the pension industry during the years of pension austerity will know little about the use of pension schemes as a force for good
Rewrite your SIP in 2024
The strategic approach to funding taken by pension schemes will bifurcate in 2024 between those schemes who reject lockdown and the tyranny of the Regulator’s DB funding code and those who camp outside the doors of the insurers, craving buy-out.
Many boardrooms now recognise that what has happened to their pension schemes was unnecessary and hugely wasteful. The adherence to marked to market valuations throughout the period of QE led to the blow-up of 2022 which could and should have been avoided.
The pursuance of liability hedging to the exclusion of genuine long term investment is not what many senior executives consider the proper way to run a business or a pension scheme. It is the way to run a quiet graveyard, to perpetuate the stagnation that seems to currently grip our economy.
We should be urging the trustees of our pension schemes to rewrite their Statements of Investment Principles to run on 4 good , as William McGrath urges us to do. Most schemes won’t , but enough can to re-harness the positive power of pensions to revive our flagging productivity,
