Is the monkey now off the Pension Regulator’s back?
The Pensions Regulator finally got to lay its “new” DB funding code of practice before parliament yesterday and it will be the subject of interminable discussion from the actuariality.
The trade press are all over it expressing a range of opinion summed up by the headline
Industry welcomes ‘balanced approach’ of new DB funding code of practice
Con Keating , a consistent critic of the analytic process adopted by TPR has this to say
In the press release accompanying the DB Funding Code of Practice released today, Neil Bull refers to DB schemes having £1.3 trillion of assets at March 31 2023. Their previous published value for that date was £1,415 billion. PPF published a value of £1,439.8 billion at the time, which was subsequently revised down to £1,404. The ONS survey estimate is £1,228 at that date.TPR will have now seen and processed this year’s set of scheme returns which will contain an extra one third of schemes’ triennial valuations. So over three years we would expect TPR figures to reconcile with the ONS results. It will be another two years before TPR is using full valuation data for schemes.The problem with the new funding code is that the estimates of its cost were made using the old figures – TPR have just implicitly recognised that the cost will be £100 billion more that they stated in the Legislation’s impact assessment.”
This is more than academic griping. The optimistic view taken by the Pensions Regulator is that most schemes are now in low-dependency mode and that the covenant of the sponsor is decreasingly important as schemes move into self-sufficiency.
The truth is that the Pensions Regulator is making decisions on stale data and almost certainly underestimating the challenge ahead for occupational schemes.
Thankfully, it appears that the rigidity of the original funding code has been eased, a degree of discretion has returned and the impact of the changes estimated to be low *£20.4m). The Impact Statement for the Code is however nine months old and will have been based on the rosier numbers of TPR (not the more realistic numbers of the ONS).
The Code arrives at a time when pension schemes are being asked to take a long-view of the future. TAS 300 requires the actuariality to consider run-on as well as buy-out, the option to co-sponsor with capital rich backers and to consolidate into pension superfunds.
The idea of low-dependency being simply a matter of funding and prudent asset allocation is challenged by TAS 300 and by the Pensions Regulator’s new found enthusiasm for schemes to embrace risk and leave the quietest graveyard.
I suspect that the monkey of the DB funding code is finally off TPR’s back and clambering over the parliamentary benches. It will help the actuariality to provide guidance to trustees and it will help trustees to continue to aspire to self-sufficiency, but it will do little to move the dial on the fundamental problem- that pensions have become a hindrance, rather than a help – to this nation’s economic welfare.
The Pensions Regulator is in catch up mode, but it started from a long way off the pace and – as Dr Keating has explained – it will be years before it gets back with the pack
They cannot even blame a puncture for being so far behind the pace!
The most recent data released by ONS (September 2023) – we see the December 2023 and March 2024 figures in September – show a discrepancy of £249 billion between TPR and ONS estimates. If, as we believe, the ONS figures are correct, this implies a tax cost of £50 billion over the coming five years or so, as sponsors make deficit repair contributions chasing low-dependency funding.
It puts Reeves’ £22 billion shortfall in the shade.
It would also mean that sponsors are unable to make many of the productivity enhancing investments that are needed. Prominent among these are intangibles such as staff education and training. To quote the recent IMF publication:
“The UK workforce has larger and more chronic skills gaps than in most peer countries, with surveys reporting widespread recruitment difficulties, with implications for output, in high-skill sectors like digital and software, manufacturing, medicine and life sciences, teaching, and construction. This partly reflects declines in primary and post-secondary education outcomes (particularly science scores, over the past two decades) and in workplace training and apprenticeships, particularly for the young. Moreover, the recent increase in non-EU migrants has not fully offset the adverse impact from Brexit on the availability of needed skills, including because smaller firms face more recruitment hurdles with regard to non-EU hires. Against this backdrop, there is an urgent need to upskill the UK workforce, both by building on ongoing efforts, as well as additional concrete measures to: (i) encourage students and young workers to join and excel in STEM; (ii) ensure adequate vocational and on the job training, particularly for the young; (iii) retain the talent produced by UKs world leading universities; (iv) upskill the existing labor force; and (v) facilitate attraction and retention of in-demand skills through adjustments to the visa regime.”
The picture of Tom Pidcock may give a wrong impression in that he won gold in the end … by taking risks all the way to the end of his race.
Perhaps a picture of Josh Tarling from Saturday’s time trial would have been more appropriate, as his puncture caused him to finish fourth.
There are, of course, no medals for coming fourth.
I’ve mountain biked once at speed (not anything at all like Mr Pidcock).
The uphill parts are utterly exhausting and take a lot of sustained effort at what feels like a laboriously slow pace. But the downhills are utterly terrifying and every turn, bump, tree and jump is fraught with genuine danger to loss of life or limb. And the older I get the more difficult it gets and the dangers outweigh the rewards. So be it with pensions and investments. You cannot succeed with both the effort and the risk.
Investment (as opposed to asset allocation – the shield the consultants hide behind , or gilt loaded LDI the technocratic abandonment of all responsibility for investment in our children’s futures) is hard, as it NEEDS risk, and it needs younger people (than I) at the decision making table now for it is they it affects most and it is they we are expecting to pay the price of our missed opportunities ( hint – they won’t – current trajectory will leave them with no choice but to inflate away or confiscate our pension assets and pensions).
Apols, pre-coffee iPhone no glasses typo, should of course say
“ You can only succeed with both the effort and the risk”
There’s a danger I read way too much into Henry’s use of a Tom Pidcock photo, but I glimpsed parallels with French spectators booing Pidcock at the finish and TPR in Brighton dissing well-meaning trustees for appearing to take reasonable investment risks.
Unlike many of his supporters at the finishing line, the French silver medallist, Victor Koretzky, sportingly admitted afterwards that he had chosen the wrong line in the decisive section of the course under the trees.
Would that TPR could be prepared to admit it has taken a wrong line at times.