William McGrath presented to the Pension PlayPen this week and while I couldn’t be there, I’ve had the pleasure of watching him present and following the debate that followed. This really is a most interesting hour view.
McGrath argues that simply handing the agenda to the insurance industry is lazy thinking and that the new TAS 300 standard is the lever on the actuarial industry to get its act together.
There is one critical question McGrath is asking
“How can an industry that is transferring £50bn of pension liability from one regime to another , not actually do some basic work that works out what this means?”
Ignoring TAS 300, means ignoring the discretionary powers of Trustees to enable discretionary increases to be paid.
The “endgame for the endgame” could be upon us.
While many will not have an hour to spare to listen to the debate, we all have a few minutes to read some highlights which I include below.
Challenges
Rosalind Connor questioned whether many schemes, getting money back from a surplus is difficult. Is there a case Government intervening to re-tip the balance to allow surpluses to pay DC contributions and use the surplus for non-pension purposes
Get rid asap?
McGrath responded that there needs to be an appeal to the boards of corporates. Pensions should be part of the ESG rating of a corporate. Corporates can address the pension scheme when they see how the pension scheme can help them fulfill their climate change agenda.
The political agenda for growth is creating an obligation on companies to use pension schemes for productivity.
Will the pension scheme send you to prison for 7 years?
O’Connor pointed out the over-legislation against pension schemes caused corporates to see their pensions as a threat rather than an opportunity.
The Pension Regulator’s hostility to any kind of risk being taken by pension schemes, creates new risk for trustees.
In answer to a later question, McGrath called on Trustees not to be intimidated by the “thin layer of legality” to these threats.
Is the job of a trustee to give a better pension or just the minimum promised pension?
O’Connor questioned whether the duty of the trustee to do the best for the member. McGrath agreed that this was a moot point. The legal opinion here seems at odds with common sense.
Should we be widening the pool of DB beneficiaries
Peter Cameron-Brown suggested that the Trustee’s Duty is to pay discretionary benefits when they are in the deed. He remarked that applying the surplus to DC benefits, the surplus is going into individual accounts, by investing in DB benefits, the surplus is being pooled. He argued that schemes should consider widening the pool.
McGrath stressed that the solution did not have to be controversial but could be inclusive offering a DC tier and improvements to DB benefits “What a great chance with a new public policy team arriving, for Government get back to the situation before “project pension fear” arrived.
Bryn Davies asked how the FD could be bought into the C-Suite agenda?
Davies pointed to the consultation on the use of surpluses. Consultation doesn’t add up to much, proper discussion comes from deals being made between member representatives and employers. The precedent is good.
Davies pointed out the gaps in PPF cover, especially in pre-97 cover. The PPF is a safety net with holes. Running the scheme on provides protections for members that the PPF doesn’t.
McGrath suggested that shareholders need help from stockbrokers on the value of pension schemes. A mindset shift is needed from the HR departments and those in ESG governance in providing a holistic approach to pensions.
Susan McIlvogue of Hymans Robertson concluded the discussion with her view as a 30 yr practicing scheme actuary that the industry should indeed be pushing the actuarial profession. It was a positive finale to a positive meeting.
The detail
We have curated the slides to this event which you can download here or flick though using the deck below
This was indeed an hour well spent, thanks to a great presentation from William McGrath and an intelligent and educated discussion.
To clarify my own points (and I wish to emphasise I am a Trustee not a lawyer):
Defined Benefit pensions are deferred remuneration for a period of employment. The deferred remuneration is set out in the Trust Deed and includes guaranteed pension benefits and may also include discretionary benefits. While the Scheme remains in existence, Members do I believe have a right to have discretionary rights to be met out of scheme resources and this right outlives the transfer of the responsibility for the payment of benefits to an insurance company or another arrangement. I therefore believe that the buy out terms must reflect both unfulfilled past potential discretionary benefits and also future prospective enhancements.
This in my opinion means that scheme “run on” must be the default end game and any decision to follow a different path must be justified by Trustees purely in terms of the interest of Members. Section 5 of TAS 300 appears to cover this but does not specifically refer to discretionary benefits set out in the Deed, particularly those where the discretionary power is subject to a defined limit.
The second point I was making that is that it has been suggested that employers may wish to reopen closed DB Schemes to a new DC benefit section for current employees as a tax efficient way of accessing scheme surpluses. I queried whether it would be more appropriate for employers to open a new DB benefit section, with benefit levels they are content to fund (at a minimum the auto-enrolment requirements of 1/120th average salary with discretionary benefits funded for minimum rate revaluations and pension increases). In this way surplus assets are not transferred to the individual accounts of the DC Members and remain available to fund the benefits of the Members of both the historic and new DB sections on a pooled risk basis – and even perhaps generating largely surpluses which could be considered for distribution to both members and the employer.
Running on with a new DB section may also be attractive to employers of schemes who are not fully funded on a buy-out basis as this would allow the funding of pension payments out of current contributions thereby minimise the need to sell capital assets and/or suck deficit recovery contributions out of the employer that would not be required in the run-on situation.
Although not raised in the session, I also now wonder whether the actuarial report to employers required under IAS19 will now be prepared under TAS300 and particularly reflect appropriate buy-out costs (including discretionary increases where appropriate) in advice on asset ceiling values to applied to the (contingent) pension scheme asset value of a closed scheme and reported on the Company’s Balance Sheet?