Though Dr Iain Clacher never quite made it onto the webcast, attendants of Pension PlayPen’s last webinar of the financial year were treated to the sombre tones of Dr Con Keating who talked us through the anomalies between data supplied by the Office of National Statistics, the PPF and TPR.
You can watch the recording of the event for yourselves here.
Con’s slides are available to download from this link and can be flicked through below (thanks to the wonder of SlideShare)
Key takeaways
This information is getting airplay in parliament but is being ignored by the pension press (witness no press today). This is odd.
Similarly, it is not being picked up by consultancies in general, despite the co-operation of three consultancies in supplying Con and Iain with data.
The Pensions Regulator did not join the call though there was a representative of the Work and Pensions Committee present.
The DWP’s Impact assessment has been based on disputed data . The Pensions Regulator’s impending DB code looks like being based on disputed data. The not unreasonable conclusion from Keating and Clacher is that any further policy from either , based on the TPR/PPF data be put on hold.
The Feedback
There was a very noisy chatroom (which I unfortunately failed to capture). The general tone was of disbelief that TPR appeared in denial it had a problem, consultants in denial about the data anomalies and trustees conspicuous by their absence from the debate.
There were only 33 people on this call but they included many experienced individuals, including senior figures in the Financial Reporting Council and the Work and Pensions Committee.
This issue is unlikely to go away and the scandal is , it is getting so little publicity.
Inconvenient truths. Lays bare the disregard of TPR, their cult like approach to disinvesting the economy, and that it’s yielding easy money for the consultant and investor class, who are more concerned with getting their share of the market, or about 20% of the accrued pots, and not a jot of it goes to enhance member benefits.
Needs some political ownership and vision. How long will DWP be able to continue to ride rough over the desired policy of Ministers.
TPR’s figures now fail the most elementary tests of credibility. According to TPR’s figures, at end December 2023, the decline in scheme assets from December 2021 was just £273 billion, while they reckon liabilities declined by £542 billion. But these LDI asset portfolios were supposed to be mirroring liability changes.
PPF reckons that asset decline as £390 billion. Our estimate is £678 billion.
Am I alone in thinking that it is absolutely shocking that the Pensions Regulator is overestimating the number of schemes in surplus?
The Regulator is charged with protecting the benefits of members of occupational pension schemes. It appears that by trying to deflect attention from its role in causing the LDI crisis TPR is now appears to be saying that it’s all right – we have changed our assumptions so that there are now fewer schemes in deficit then there were before the crisis! In reality many schemes are now in a much worse position to pay the benefits when they fall due because of the Regulator’s actions.
Con and Iain have patently exploded that myth even using the Regulator’s own valuation basis.
To me it seems the real position is actually much worse because by ignoring the cash flow realities of individual schemes, those schemes are investing towards a target that will be unachievable using that investment route without substantially increased deficit recovery contributions from the employer, possibly resulting in the demise of the employer. The DB Funding Regulations as it appears the proposed DB Funding Code will implement by completely ignoring the actual cash flows of the individual scheme look to make matters worse.
The problem is that the Regulator is basing their valuation models on a single assumption about the future – that the gilt yield applying at the valuation date determines the future income streams for duration of the benefit payments. No one appears to have challenged the reasonableness of that assumption, even when the gilt yield was so low and completely outside any historic range that liabilities were estimated on all but undiscounted basis, and in so doing magnified the significance of mortality assumptions. No wonder insurance companies were so ruthless in selling bulk annuities priced on this basis.
By encouraging schemes to follow their valuation methodology in making investment decisions the Regulator has encouraged schemes to sacrifice cash flows to target a capital value that reflects their valuation assumption, this has resulted in schemes selling their income earning assets in favour of no income LDI hedged funds or low risk bond assets priced at historically high values. The result is that unless very substantial additional deficit contributions are paid in, the scheme has to sell its capital assets to pay out the current year’s benefits. The choice the scheme is then faced with is does it sell its remaining income earning assets, making the cash requirement in the following year even greater, or does it sell its buy-out targeted assets, pushing the buy-out date into the indefinite future. The only alternative is to secure additional contributions from the employer to cover the year on year cash outflow of benefits less investment income in addition to any contributions required to make up the existing shortfall against the buy-out cost. Not easy to achieve in a closed scheme.
Many schemes appear to have addressed this issue by converting their LDI tracking assets into an income stream by purchasing buy-in policies. While this does address the short term cash flow issues, this is at considerable cost to the members’ benefit prospects or the capacity to return surplus to the employer. Not only was the income stream purchased at the high historic cost at the time the LDI product was entered into but the scheme has now lost the key feature of whole life defined benefit schemes – risk sharing where the surplus created on the demise of a member is made available to fund the benefits of other members.
It appears a shame that the whole pensions industry appears to be ignoring these fundamental issues and not seeking to get to the root of the problem.
Am I being silly? Why is nobody (except perhaps the politicians) shouting about this from the rooftops!
“ It appears a shame that the whole pensions industry appears to be ignoring these fundamental issues ..”.
The very sad truth of the matter is that by on large the “industry” views the workers pension savings the same as AUM from which the consultant-class skims a risk free annuity based on a narrative and rules they created to justify the continued extraction of value. And very well they are doing from it.
I’m sure Post Office management (under the wing of successive Govt’s) also thought they’d managed to move on, ignoring the known realities of the Horizon scandal.
I’ve no doubt TPR have no interest whatsoever in anything other than an LDI smokescreen, happy to leave a fog of data misinformation. But the disastrous long term socio-economic impact from the truly enormous scale of dis-investment wrought by DB schemes under TPR direction will become increasing difficult to ignore.
We’re witnessing the foundations of a text book study for future students of political economics on how to turn a once cherished economic miracle that was the funded private sector DB pensions, into the dragweight anchor of gilt funded schemes, stripped of value by Govt’s and consultants alike. The economy and the members the only losers.
A great post
Thank you jnamdoc, I do not feel so alone now.
But how do we get it before the general public before even more damage is done. Perhaps a docudrama on Philip Green and the £350M Debenham’s pension deficit – which appears to have suddenly disappeared might get some attention!