It’s useful to hear David Fairs look back on the gestation and progress of the DB funding code, I nearly said “his” funding code, but he reminded us when he opened up that he has moved on.
So what did we learn…
1. That covenant assessments are over rated
Fairs pointed to perhaps the biggest change in the Pensions Regulator in the past 12 months, the shift from a dependency on employer sponsorship to a culture of low dependency.
David Fairs observed that DB advisers are still unusually concerned with the employer covenant.
He claimed that trustees were still spending a lot of money on covenant analysis when they already have enough money in the kitty. He asked “is this proportionate?”
So how has the role of the covenant adviser become so important to the trustees and the Pensions Regulator?
Fairs pointed to his own time in the dock at the Work and Pensions Committee where corporate failures are considered “scandals” by Frank Field who gave corporates, trustees and regulators a hard time .
2. That September 2022 still dominates thinking over liquidity
David Fairs talks of “liquidity” as the September 22 problem resulting in 22 mentions of liquidity in the funding code.
He called the Truss mini-budget
“The most significant fiscal event over my time at the Regulator was the 2022 mini-budget”.
But questions from the audience suggested that it was not the assets owned but the borrowing of trustees that was the root cause of the fire sales that followed cash calls from the banks.
Padraig Floyd was quick to ask why the Mansion House reforms were omitted from David Fairs timeline of significant events leading to the DB funding code.
David Fairs did not think the investment of scheme assets material in productive finance material to scheme funding.
Paranoia about liquidity remains a threat to the implementation of Mansion House in DB and it’s clear from David Fair’s analysis that the DB funding code is still no friend to the Treasury’s calls for better use of the longer term durations of DB pension schemes “running on”.
3. That TPR’s still more concerned with schemes gaming the PPF than supporting the growth agenda
Although David Fairs analysis did not mention adding and replacing support for schemes with private capital backed journey plans, David was asked whether these were influencing thinking at the Pensions Regulator.
When I asked about the guidance to trustees and those supporting schemes with capital in the recently published guidance, he agree and remarked that more guidance is on its way.
While much of the noise is about “superfunds” consolidating weak schemes most of the discussions I am having are around stronger schemes with employers struggling to break free of deficit payments and recover money that is now surplus to the trustee’s needs.
The Regulator remains more worried about schemes using fast track to get round deficit reductions and Fairs said it will be using machine to read through the 1600 valuations it has submitted each year. The plan is to weed out outliers to the fast track guidelines while the vast majority of resource will be directed to bespoke schemes.
4. That risk still an imposter in the quietest graveyard
Rosalind Connor, asking about the level of investment risk a scheme can take, pointed out that there remains a real conflict between the employer and trustee in how a scheme should be invested
She pointed out that nothing in the funding code effects how the trustees invest – the legislation doesn’t encroach on trustee powers.
David Fairs suggests that the trustees and employers have to agree a strategy, but the trustees can deviate from it where it seems appropriate.
In the climate of “de-risking” that has persisted for 20 years, the Pensions Regulator is still struggling to open the gates to their quiet graveyard and encourage trustees to resist the temptation to be zombies.
An impression not a factual account
This is an impressionistic summary of what I heard from David Fairs and the 35 people on the call.
It was a high quality session with excellent contributions from Con Keating and others that I have not space to include.
Pension PlayPen coffee mornings continue to encourage debate and keep minds keen. Thanks to David for his time and for sharing his thinking and his slides with us.
If you didn’t attend and want to make your own mind up, please spend some time watching the video and flicking through David’s slides
You can watch the video here and read the slides at the top of the blog.
Gamekeeper turned poacher, since March 2023?
But while at TPR, Fairs said this:
“…. assessing the employer covenant as a key underpin for the level of risk that is supportable on that journey – considering cash, prospects and contingent assets.”
16.12.22
“One of the first steps …. is looking at covenant, looking at our covenant guidance, and setting out how our thinking has developed over the time period since the first code consultation …. TPR is talking to covenant advisers.”
29.4.22
“It is too early to tell if we will see a rise in company insolvencies, but uncertainty remains. If there is a prospect of insolvency or a restructure of scheme employers, trustees should probe the covenant even further and take professional advice to gain a fresh view on covenant strength to ensure their scheme is being treated fairly.”
26.5.21
“Our key focus is on those schemes carrying more risk than their covenant can reasonably support and who are not considering that they do not have time for their investments to repair any damage.”
17.2.21
“Trustees should consider obtaining independent specialist advice to support covenant assessment, and only undertake their own covenant assessment where they have sufficient expertise. In current conditions, TPR expects the frequency and intensity of monitoring to be significantly increased until covenant visibility and strength is restored.”
6.5.20
“Schemes that have had 2019 valuations who are in the process of completing those valuations have been set out some guidance, not to fundamentally change the assumptions that they are using for their valuations, but to look at the covenant strength of their sponsoring employer, see how that’s changing and to think about what that might mean in terms of future contributions, and deficit contributions.”
28.4.20
It’s all well and good to produce another set of guidance, again borne out of the protection of the PPF and to be considered and implemented by each scheme in isolation. Without lifting our heads up, more group-think will ensue and the wrong decisions made again, with strategies that minimise the risk (of being wrong) to the the advisory community and fund managers (“the industry”) will prevail, but which miss the actual objective of supporting an invested economy so desperately needed to creat the jobs and wealth to be able to afford to pay pensions.
A philosophical pension review is needed, the outcome of which will once again be to rediscover the notion that pensions are but a social and economic contract between the generations, with the current investing (and taking ‘risks’) in the next so those that follow can provide/gift a living wage to those whare in retirement. We need to stop treating pensions as financial products offering a false hope of derisked certainty.
“The [Morris] review [of the actuarial profession] acknowledges the critical role of actuaries’ skills in assessing long-term liabilities but questions whether actuaries are necessarily best-placed to advise on asset allocation or fund manager selection. The review provides an opportunity to reflect on whether users have become over-reliant on actuaries for services beyond long-term liability analysis.”
Sir Derek Morris, March 2005
On employer covenants, Morris found this:
“… the strength of sponsoring company covenants with respect to their pension schemes should mean that the audit of a whole entity, company and the pension assets and liabilities in that company’s accounts, should be sufficient.”
In November 2005, the Sponsor Covenant Working Party of the Institute & Faculty of Actuaries reported thus:
“We recommend that the Pensions Board adopts and publicises to pensions actuaries the view that
• before advising on the assessment of a sponsor’s covenant in relation to actuarial advice, actuaries should consider carefully whether they are competent to do so, and
• the actuarial training and typical actuary’s experience is unlikely by itself to provide an actuary with this competence.”
Sounds to me as if actuaries should leave covenant assessments to auditors and/or insolvency specialists.