Site icon AgeWage: Making your money work as hard as you do

Do DB pensions matter? It seems not.

henry tapper

Compare and contrast how the DWP are selling themselves to the public

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

    1. withdraw from investment in the real assets of the UK
    2. disinvest from our national stock market
    3. ignore our investment companies and the private assets they hold
    4. most recently , sell of gilts to buy debt – increasingly debt in foreign companies
    5. 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?

 

Exit mobile version