Collected wisdom of the Pension Oldie

The Pension Oldie is a legendary figure on this blog. Lately his comments have scaled new levels of perspicacity.

Here he is speaking out on turning pots to pensions

From my previous comments on your blogs, Henry, it will come as no surprise to find that I do strongly support the contention that a DB arrangement is the most efficient and cost effective way to provide a secure pension income.

It is only a shame that TPR seems frightened to accept responsibility for anything other than an ever shrinking proportion of the nation’s pension provision (DB and DC Trust based arrangements combined) and are ever keen to push the responsibility over to the FCA through encouraging bulk insurance company buy-outs etc.

Only time will tell if they will ever grasp the nettle of seeing their role as one of providing a regulatory framework to encourage the direction of pension savings into those arrangements that are most likely to give the best outcome.

In the meantime the most efficient vehicle already within their remit is whole life DB – why are they not encouraging the re-opening of closed schemes to DB accrual?

And this is his response to the Pensions Regulator’s blog on innovation this week.

Is not the most efficient way to provide individuals with a pension for life getting the benefits of consolidation, investment policies not having to consider accumulation and decumulation phases separately, the removal of vital financial decisions from individuals who are ill-equipped and or do not wish to take the responsibility for those decisions, and demonstrates clearly greatest value for money for contributions paid in is not a trust based defined benefit pension arrangement?

I believe the original concept behind CDC (I believe originally called Collective Money Purchase) was for a mutual trust based scheme to provide a targeted but potentially variable annual pension benefit for the contributions paid in each pre-retirement year. It was only to effectively shoe-horn the Royal Mail’s desire to contribute to such a scheme into existing regulatory structures surrounding occupational pension schemes that it was forced into legislative and regulatory structures as if a personal pension scheme under s5(3)(b) of the Pensions Act 2004 as “a personal pension scheme where direct payment arrangements exist in respect of one or more members of the scheme who are employees”. The consequence being that the CDC concept has lost many of the advantages of a defined benefit arrangement and now appears to be unworkable (apparently to date even for the Royal Mail employees).

I am happy that the Pensions Regulator is expressing its willingness to embrace innovation and presumably to reflect demands from the legislature “to protect future, as well as past, service benefits TPR should work with the pensions industry on what the change would mean in practice and what capabilities it will need to deliver on it effectively” House of Commons Work and Pensions Committee – Defined benefit pension schemes – Third Report of Session 2023–24 para 28. However the comment that the unnamed potential innovation proposition straddles both DB and DC suggests to me a rabbit caught in the headlights type reaction – how does this fit into the existing regulatory framework? Only time will tell whether TPR (and probably the Treasury) are really willingness to promote such innovations or will the issues with Collective Money Purchase and Superfunds other than those targeting buy-out (although Clara itself has indicated that it is unlikely to be in its interest to buy-out the Debenham’s pension scheme liabilities for at least 10 years) be continually repeated.

In the meantime it appears the one target that is entirely within the existing powers of TPR and other regulatory bodies is to protect future service benefit is to increase the availability of DB pension benefits to the current workforce. This could be most quickly achieved by re-opening existing closed DB pension schemes to new Members. Why is this not being promoted by the Regulator as an alternative to an “end game”.

Here he is on the implications of TPR’s most recent annual DB funding statement.

As well as Con’s very well researched point above. TPR’s analysis misses a further important point that TPR’s encouragement to all pension schemes to fund in line with their unrealistically prudent valuation assumptions has significantly downgraded the income earning quality of the assets of pensions schemes. Furthermore this will only emerge with the passage of time.

The most frequently occurring valuation dates of the T19 tranche to which the 2024 Funding Statement refers are the 31st December 2023 and 31st March 2024. The real gilt yields (against the derived 20 year RPI inflation assumption) used for the previous valuations for this group were minus 2.58% (31/12/20) and minus 2.20% (31/3/21). This compares with the current valuation values of plus 0.84% (31/12/23) and plus 0.97% (31/12/24).

The current values are much more in line with the long term values if you disregard quantitative easing distortions (the real yield at the 31st December 2003 a possible base date used for the establishment of the Technical Provisions model was plus 2%).
The implications of a negative gilt yield being used for the valuation models is that a scheme will only report a surplus if that surplus is large enough to cover the shortfall in annual investment income over the lifetime of the benefits.

More significantly the deficit recovery contributions being demanded from the employer sponsor are being set on the premise that the employer will have to make good on an annual basis the shortfall of 2.58%/2.2% of the RPI inflated pensions in that year.

The problem is that if Schemes set their investment policies to match/hedge these valuation assumptions, although the current valuation is now based on more realistic assumptions and will report a lower liabilities compared to asset values, the scheme will not be able to achieve the future investment income assumed by the current model. Deficits will emerge on subsequent valuations as the scheme sells its capital assets at an increased rate.

Deficit contributions based on the previous valuations assumptions are not only now locked in but will need to increase to cover the loss of income from the excess asset sales.

This could be very significant – one “well” hedged scheme I have looked at with already a long asset backed recovery plan will require a quadrupling of the annual deficit contributions.
TPR appear to be missing a review of asset quality in their risk assessments.

Assets and liabilities

Our pension assets are more than a balance sheet item, they include the collective wisdom of pensioners like “Pension Oldie”, Con Keating, Bryn Davies, Andy Young, “Byron”, Alan Higham , Adrian Boulding, “Jnamdoc”, John Mather, Peter Tompkins and many more – all regular contributors to the blog. (parenthesis = pseudonyms)

Those who hold the keys to the regulatory cupboard have , in the comments on this blog, an invaluable store of feedback on their actions. It may not be what they want to hear, but collectively and collectedly it is what they need to read.