Compare and contrast how the DWP are selling themselves to the public
#ThreeThingsThatMatter – Pensions Special pic.twitter.com/8zfCVD4jeu
— Department for Work and Pensions (@DWPgovuk) February 22, 2024
and how they are promoting themselves to the pensions industry
“The government is overhauling the pensions landscape to provide better outcomes for savers, drive a more consolidated market, and enable pension funds to invest in a diverse portfolio.”
These words, were they from a Pension Minister anticipating the enactment of this ambition, would sound brave and exciting.
But these words are tinged with the regret of lost opportunity. We should-right now- be contemplating the enactment of the mansion house reforms, instead we have yet another consultation on future intent.
The ideas within
are well rehearsed.
The Government says it wants to push ahead with LCP’s idea of offering 100% protection from the PPF in return for a 0.6% of assets “buy-out liabilities” as an annual insurance premium.
The Government say that in 2026, it intends to have the PPF swallowing up the schemes that are too weak for the pension superfunds, assuming we can use the plural by then.
The Government want to make it easier for well funded schemes to extract surplus and so run on rather than buy-out. They are considering offering the schemes the option of a statutory override of their rules to allow employers to get surplus money back
None of these ideas is new, none of these ideas is wrong, but we sense that none of these ideas are much more than fantasy pensions for a Government that has at best 12 months to run and little or no appetite to see any of these policies onto the statute book.
It’s too little, too late.
Consultations for consultations sake
We are now deep in the weeds of this Government’s endgame. Most people think that the best that this administration can do is to lose gracefully.
In terms of pensions, there is some hope that Rachel Reeves will take on Jeremy Hunt’s proposals delivered at the Mansion House and that VFM from DC consolidation , more productive investment and some incentive for DB schemes to run on, will turn pensions from a threat to an economic boon.
But politically, knowing you are no mor than the caddy teeing up the ball for another pension minister to take the next shot, must be a pretty depressing conclusion to your short time in office.
The ministerial foreword makes an attempt to claim credit for the supposedly healthy state of DB pensions and claims that these proposals will “ensure continued success in the DB pensions landscape“.
There will undoubtedly be a lot of people in Edinburgh next week, drinking the same Kool-Aid at the PLSA investment conference. This , despite providing over £600bn of value destruction in 2022, £166bn of which is attributable to the LDI “episode”.
The 14 years since this Government came to power have seen DB pension schemes
-
- withdraw from investment in the real assets of the UK
- disinvest from our national stock market
- ignore our investment companies and the private assets they hold
- most recently , sell of gilts to buy debt – increasingly debt in foreign companies
- turn from long term investment strategies to an endgame of at best 3-5 years duration
Belatedly, they woke up to this. It took the LDI crisis for them to do so. Now they’d like us to be part of the great success story they have created. It’s a fiction, this story is a “myth”.
Why we should spend a lot of time on this consultation isn’t clear.
DC investors are most let down
Such has been the mismanagement of the situation that our homegrown stock markets have shrunk in value while overseas markets, especially the US markets continue to surge. The only investment that has made sense to those with DC investors has been in overseas equities where we can bank growth in indices and the currency gains arising from bringing the money back to Britain unhedged.
Despite the pension freedoms introduced in 2014 (nearly 10 years ago) , most DC plans still consider they have an endgame set at some point in a savers 7th decade on the planet. Lifestyling is a bet that we want our money back “de-risked” of any growth potential at some arbitrary point linked to “scheme retirement age”. That retirement age is no longer linked to occupational retirement ages which are all but extinct and irrelevant to multi-occupation schemes such as master trusts and GPPs.
The failure of Government to properly address the DC endgame for the total mess it has become is as big a scandal as its failure to manage DB funding and the DB endgame.
Whereas DB “savers” have been bailed out by DB deficit savers, DC savers have had no deficit contributions, indeed it could be argued that the reason DC schemes are so poorly funded is because the available cash has been sucked into DB to meet the strictures of a funding regime which went horribly wrong.
LGPS – the 140% funded DB Scheme
If the DWP want a blue-print for success, it can look at LGPS, now in aggregate 140% funded, heavily invested in productive assets and consolidating towards greater efficiency.
It’s success has been off the back of self-belief which allowed schemes to avoid LDI, invest for the long-term knowing that its pensioners would still be getting paid into the next century and beyond.
The Options for DB schemes could be a lot simpler today, if corporate DB schemes had been allowed to be managed with that sense of purpose, if the PPF had been allowed to be a real safety net rather than being pampered by the Pensions Regulator. The failure of nerve that has turned an economic miracle into a DB endgame could have been avoided if successive Governments had shown the vision they are calling on DB trustees and sponsors to have today.
Any attempt to claim that the wreckage that has been left behind is a success, needs to be put in the context of LGPS, which shows just how much a failure DB pension management has been this entire century.
Options are pitiful
What this consultation presents us with is a scratching around in the fire to find remaining embers of hope. It is not an “overhaul” but some disjointed ideas that show no overall vision for the future.
The ideas of bringing DC up to the levels of DB – through CDC and through the empowerment of DB schemes to accept DC transfers get no mention.
There’s nothing in this consultation to make me feel DB is being overhauled, it is being put quietly to bed.
The PPF consolidator- if it arrives in 2026 – might be considered a small LGPS pool or a large occupational scheme
Excluding those in scope for buyout or commercial consolidation (as highlighted), if all schemes with weak to very weak covenant groups were to consolidate this would mean around 800 schemes were in scope with £80 billion in total assets.
Offering the PPF as an insurance against 100% of scheme liabilities will appeal to a tiny part of the market (as LCP and PPF except)
The introduction of a statutory over-ride to allow DB schemes in surplus to use the money more productively, is the major policy relevant policy initiative but I can see it running into a legal stockade.
On the really big issues, the DB funding regulations and code, there is no movement and that is where movement is most needed. Right now this “fantasy consultation” is too little too late , the last roll of the dice for a Government’s pension policy that has run out of time.
Yesterday saw the release of DWP’s SOS pension video. Spot any mention of DB pensions?
#ThreeThingsThatMatter – Pensions Special pic.twitter.com/8zfCVD4jeu
— Department for Work and Pensions (@DWPgovuk) February 22, 2024
Nobody bothered to tweet about the DB Options consultation.
The American dream turned out to be a nightmare for a significant percentage of the population. The dream appeals to a popularism which encourages procrastination. The result for many is poverty at a time too late in life to make adjustments.
The avoidance of reality is similar to the U.K. attitudes to pension provision. It might be unpopular but DC does bring home the enormity of the challenge that ultimately needs individual attention.
Collectives suggesting that big is good simply hides the problem serves only the “industry”. Is that blind faith trust misplaced? The results seem to indicate that for many DB avails to meet expectations.
I read the consultation paper late yesterday – having looked after my grandchildren for most of the day. It was the perfect comedy on which to end a long day.
Once again an excellent blog Henry.
I think the important paragraphs in the Introduction to the Consultation Document are:
“4. Past experience of sponsoring employer “contribution holidays” has shown that the security of member benefits should be paramount in any major reform of the pensions landscape. We are clear that changes to the surplus sharing regime should be made only where they are safe from a member benefit perspective. We are consulting on a range of potential safeguards to ensure these additional flexibilities for trustees do not threaten member security.
5. Against the backdrop of maturing schemes and improved funding levels, the introduction of superfunds will provide a secure alternative to traditional avenues for relatively well funded schemes. However, we believe opportunities will remain restricted for schemes less attractive to commercial providers. In response, we will establish a public sector consolidator by 2026 aimed at schemes unattractive to commercial endgame providers.
6. While making these changes will involve using and enhancing existing structures such as scheme funding regulations, we want to support trustees to use their fiduciary duties in the best interests of members. We are proposing a number of new measures intended to balance enhanced options for trustees with prioritising the security of member benefits.”
My limited understanding of Trust Law is that the Trustees’ fiduciary duties include discretionary benefits defined in the Governing Documents.
My own initial thoughts/questions are:
Safeguards required under paragraph 4 and the measures to prioritise the security of member benefits the should extend to include discretionary benefits.
This appears to suggest that where such benefits are at the Employer’s (or other Scheme Sponsor’s) discretion (exclusive or by consent) under the Governing Document, the calculation of the Scheme liabilities to establish any assets available for “return” to the Employer should include provision for past and future discretionary benefits.
Will the safeguards therefore restrict the Employer’s right to use its discretionary power to withhold such benefits to generate future surpluses available for distribution (i,e,, make discretionary benefits a matter for the sole discretion of the Trustees)?
The Government is therefore seeking to address the issues raised by the BP and the Boots discretionary benefits situations.
In the meantime in agreeing a buy-out or the terms of a buy-in policy, Trustees must consider whether the Members may benefits in the future be enhanced by discretionary benefits the right to which is not reflected in the buy-out policy.
in this way the Government is seeking to encourage Scheme run-on.
This is a current issue and should already be reflected in all Trustee decisions. The comments about Employer Appointed Sole Professional Trustee appointments made by the DWP and TPR might reflects concerns as to whether the fiduciary role could be compromised in such situations.
One of the assumptions that needs challenging is that the sponsoring company will outlive the membership.
Only tax funded schemes have that luxury
“Only tax funded schemes have that luxury” – that’s an assumption, not a fact.
Henry, its almost if there is some embedded vested interest in the financial and regulatory community that dare not allow any discussion on the damage wrought on DB pension aspirations of working people? I can just see Ms Trust raising an eye-brow!
The last 2 decades has without doubt brought the shameful and unnecessary systematic destruction of DB for working people (unless they work for the State especially at management or executive level) and a prolonged extraction and realisation of value by many agents – other than for the members working in the private sector; their DB benefits devalued, stopped and then tipped out into the wild-west of DC pensions to fend for themselves.
Govt has facilitated and then stood back, a main beneficiary of the great confiscation of private sector investments, effected through a web of regulatory induced exchanges where schemes swapped a once enviable basket of diversified global investments for single issuer national debt of a post-industrial underinvested low productivity State. What could go wrong?
Those who believes these +£2trn {##} of private sector pensions are safer in this new dis-invested paradigm are so lost in the de-risking cult they become delusional.
Speaking about this to many actuaries, they’ll often answer, “yes, when you step back a bit, I can see the point – in the aggregate we’ve stripped the schemes and the nation of its growth capital, but we were only trying to do our best for our ‘own’ members – we’re not responsible for the bigger picture, and the long term impact is so far down the line… isn’t it?”.
Gov’t is cornered now, having sucked the assets out of the DB Schemes, giving in exchange a bundle of paper promises (that no future tax-payer base can possibly service, especially one lacking investment and ownership), and any reversal of the gilts holding by Schemes will induce another ‘Truss’ like rate spike event – although it would be short lived, the impact on short term borrowings would be painful and would also induce an era ending re-set on property values, and so it remains easier politically to limp along, kicking it down the road.
FAS300 should prick some consciences and a reaction, and it will be interesting to see if the actuarial profession will continue to find ways to turn a blind eye to the systemic risk (of de-risking, and bulk transfers) – they usually manage to do so with some sweeping assumptions, anything that keeps these spreadsheet investors happy.
Also, when will the profession challenge Hunt on brazen expectation that a key role for private sector DB pension schemes is to fund public services! It’s surely a bizarre faustian deal for the DB schemes, disinvesting long term assets in order to purchase gilts to fund public sector DB pensions on a PAYGO basis.
## Note – it’s become fashionable to refer to the private sector DB promises as being (only) £1.4bn now, certainly by TPR in trying to minimise the sense of peril. The £1.4bn number of course is the NPV of a heavily discounted number – discounting at say 4.5% p.a. – which even if only over a 15 year period magically halves the pot. The pensions haven’t actually gone away – and the liabilities of course need be paid over more than 15 years…
They only way through this is to invest – and the biggest bang for the buck will come from encouraging DB (allowing ie remove TPR gilt biase) stored wealth to invest more
(or at least to reverse some of the dis-investment).
correction – of course, its £2trn, not billion..
“## Note – it’s become fashionable to refer to the private sector DB promises as being (only) £1.4trn now, certainly by TPR in trying to minimise the sense of peril. The £1.4trn number of course is the NPV of a heavily discounted number – discounting at say 4.5% p.a. – which even if only over a 15 year period magically halves the pot. The pensions haven’t actually gone away – and the liabilities of course need be paid over more than 15 years…