There are some consultants who see the funding of DB pensions as a mercurial science where schemes can be magically elevated from zero to hero at the click of a chancellor’s mouse. For them the gilt rate determines pension funding and pensioner security. For these people , the market is a “gallimaufry of gambols” full of  “new endgame options” to discuss with eager clients. The current craze appears to be for funding stabilisers. This seems to involve a lot of hedging so that schemes can dock with the mothership (the insurance company).

There are some boring consultants who take a more steady view of scheme liabilities, reckoning them a series of payments stretching into the distance that in nominal terms are immutable.

First Actuarial chart the progress of scheme funding over the years, using a best estimate basis. So rather than discounting liabilities with reference to the risk-free rate (gilts), they use a typical asset mix employed by a scheme and the assumptions trustees make on future returns. On this basis the funding level remains boringly consistent. First Actuarial are not making a lot of noise about “end-games”.

First Actuarial also show the return that is needed both in actual terms (light blue) and as a return above inflation (dark blue). Most of the time the return needed has been below inflation, it is only recently that an above inflation return has been needed for schemes (in aggregate) to be fully funded.

This is rather less newsworthy but worthy of this humble blog, which likes to put things in perspective. The perspective it takes is that pension schemes were designed to pay pensions not to sell off assets and liabilities to insurance companies with the assets discounted at typically 20% to meet the insurer’s margins.

I can see why a more exciting narrative proves attractive to some consultants ( and to journalists), but the plain boring fact of the matter is that liabilities remain the same in nominal terms and assets tend to perform in a predictable way over time, so scheme funding is really not so much an art as a science (as actuaries like to tell me).

Nothing to see here

While there are plenty of people finding new ways to “de-risk” sponsoring employers from the supposed volatility of the funding levels of their scheme, dear old FABI marches on, showing nothing much changing. This is the boring but important message of funded pensions, left to their own devices and without the intervention of sophisticated notions such as LDI and volatility hedging , schemes will run-on in majesty.

Pension bandwagons come and go and are painted livid colours by those who think they’ve “seen the future of rock and roll” (late 70s reference for my generation).

But the only thing colourful about a best estimates approach to funding is the colour of the lines of the graph.

The current stability in gilt yields is helping consultants to use their elevated plateau (eg 4- 5%) to argue we are in an era of “new hope”. This is nonsense, we are in the same era of hope as we’ve been in for many years.

The Pension Regulator’s DB funding code is another wagon that keeps on rolling and I understand from correspondence seen , that its finalisation has rolled on another few months into the summer with its application now due in September.

Watching its journey into the sunset is another occupation of journalists and bloggers. Tying TPR’s wagon down is proving as fruitless as painting the current bandwagon for “endgame options”.