On hearing about investors looking to buy firms with DB surpluses to get some of that surplus @PensionsDave said “oh an albatross becomes a golden goose!” The guy’s a genius. https://t.co/ZNVXvpXl3t

— Dave Brooks (@PensionsDave) February 13, 2024

“Should companies sponsoring a pension with a DB surplus be upgraded?” – asks the Swiftie.

For two decades, the M&A market has regarded sponsoring a defined benefit pension scheme as an albatross around a company’s neck. A metamorphosis may have taken place

Nope – that’s the Raven’s line

It’s true!

Royal Mail has a £2.5bn surplus on its DB plan

BP has a $7.9 bn surplus

To name but two!

Despite having wiped between £425bn (TPR/PPF) and £600bn (ONS/Keating& Clacher) off their value in 2022, the corporate funded DB schemes that aren’t in the PPF, are collectively in surplus.

Readers of this blog will know that these surpluses and deficits are as fictional as Coleridge’s albatross and that goose that laid a golden egg. On a best estimate basis, valuations have remained pretty solid over the past ten years as testified by the First Actuarial Best Estimate Index (FABI). There is nothing special about the £220 bn surplus today, it looks like the £220bn surplus in 2015.

Follow the green line

The question we should be asking, is why we so down valued companies because QE created artificial deficits after 2008 and why we are now experiencing irrational exuberance over surpluses created as yields returned to historical norms.

The answer is of course that if you choose to value your pension liabilities with the relation to the gilt rate, you become a slave to that rate to the point where your company is in hoc to the pension scheme for its valuation too. Which really doesn’t say much for the role of productive finance either in our pensions or in the strategies of the companies that drive a good part of the UK economy.

Of course we could choose to give these “golden eggs” to insurance companies and exchange value for certainty.

anyone know this farmer?

and we could choose to live in the quietest graveyard where endeavour is all but extinct in a risk-free culture.

What could be left of our DB schemes

And many companies have done this, are doing this and will do this. I suspect that in years to come , they will regret doing so as they see their peers enjoying the fruits of their pension schemes as surpluses are returned to them and corporate valuations increase.

Some companies may even consider that the fiduciary duty of the trustees and the original intent of the company means that these surpluses result in “shared outcomes” where the surplus is paid not just to the shareholders but to the pensioners.

An index-linked pension may be considered gold-plated but it is not a golden goose.

It’s what you get for working hard for an employer for a period of time. It is based on length of service and value to the company (defined by final salary or career earnings).  It is deferred reward for services rendered.

There is nothing unfair about defined benefit pensions. What is unfair is that so many people were denied entry to these great schemes when they were open and so many people today have no access to a defined benefit pension plan either at work or after work.

We are working on that but we are not going to call our Pension SuperHaven a golden goose plan and it won’t be an albatross either. It will be what it is, a way of turning DC pots to DB pensions using the long-term advantages of pension investment.

‘The man hath penance done, And penance more will do.’