I’ve been rather carried away by the Bim and Paul show at the WPC and will continue with cheesy headlines that could dilute the impact of important pension issues.
Yes I know the difference between a surplus and a surplice and “no”, nuns have nothing to do with it, except perhaps that like pension schemes they are much understood.
Some sobriety is needed and it comes from Jo Cumbo who reminds us
The government is consulting on proposals to enable employers to use surplus funds built up in defined benefit plans. These schemes currently serve around 10mn members.
Should surpluses go to employers so they can produce and pay more, or should they go to pensioners so they can be more economically active by having money in their wallets and purses? Or should they stay in pension schemes , awaiting the next market downturn and increase in liabilities when interest rates come down?
The answers to these questions will differ from scheme to scheme and will be answered by employers, trustees and hopefully in consultation with members and even current employees. I can think of no better ways of getting people engaged in pension matters than debating who gets what. BP and Shell should try it, unions should insist on it and the legion of communication consultants, who schemes pay so much for, should make it happen.
It is a matter for discussion by existing staff who are most likely not in the DB scheme , because surplus in the DB scheme could be recycled into DC pots – via the employer. There may even be ways for hybrid schemes to pay internal transfers – all things are possible if you pay lawyers and actuaries enough.
So this blog is not about what should happen , but what could happen and right now not much is happening because most employers have got it into their heads that surpluses are for spending on insurance policies. The 20% cost of a buy-out in terms of the technical provisions of a DB scheme is happily being considered by the currently well-funded pension schemes and their sponsors as good-value. It can’t be considered as “fair value” in the technical sense because fair value is about 20% less – in terms of the premium paid by the scheme for the guaranteed that the scheme will eventually go away.
Frankly – that is a very expensive way of getting rid of a problem and members, employees, trustees and regulators are waking up to the reality that it is not necessarily fair value for the tax-payer. For the tax-payer is responsible for most if not all of the surplus through the taxes foregone to get money into DB schemes and foregone for keeping those monies invested.
Surplice extraction – should not happen to a nun
Agreed – nuns have rights and the right to their surplice is one of them
Surplus extraction – should happen to a pension scheme
There is no point in keeping surplus in the coffers of a pension scheme. “Investing for surplus” as the DWP is now calling it, is a stupid idea.
Surplus funds should be being used productively. That doesn’t necessarily mean in the pockets of the insurers who know no better than to lend the money back to corporates without any clear instruction that the money be invested productively
Surpluses should be returned to employers, employees and pensioners with a view to the money being spent productively. We cannot order people or companies how they spend their money, but depriving them of money that is available is a 100% nailed on certain way of ensuring that we continue to see economic stagnation in the UK.
