The following slides have been described as “academic”, “hard” and “dry”. I do not publish them to promote this blog in sensational style. Yesterday Con Keating talked us through the numbers with a stern discipline. The video is yet to be published, as is the article from Keating and Clacher. Both will appear on this blog as I will not duck from the problem these two academics have unearthed and wish to be looked into.
To put it in basic words. The Pensions Regulator is increasingly promoting its bright idea to manage out risk over the past two decades as a success. The Pension Protection Fund are less sure and the Office of National Statistics are now explaining what has happened over the past three years as not calamitous but far from a rosy view of DB funding. In short. Keating says that if you read the ONS report in detail. it is hard to consider the PPF and TPR as credible. Keating and Clacher are suggesting that we are living in a time of false surety about our pensions. You can access the slides and download from this link
I will not repeat Con Keating’s explanation, I am not good enough for that. At the Work and Pensions Select Committee which I spoke at in 2022 , I spoke alongside Keating and Clacher and we all stated that we did not think we would properly know the impact of the LDI problem till we had a full cycle of valuations. The full information to work out what actually happened will not be with us till 2026 but the journeys are not being presented in the same way
Here is the problem we have – there is no consistency between the PPF, TPR and ONS on what has happened to DB scheme funding levels over the past three years. We are moving to a point where we ought to understand what has happened and we have three radically different versions.
The Problem
The Problem
The problem starts with the analysis of scheme assets and shows the ONS has seen a loss of more than a third of the assets they’ve analysed over the past three years . The PPF offers a loss of 21.5%, the Pension Regulator has only published figures till December 23. However it looks from numbers from PPF and ONS that the stated loss of15.2% will be smaller for December. In short TPR seems to be publishing a different view to ONS. This goes for assets and it also goes for liabilities. Revisions are happening but more need to be made if we are to have a single view.
Revisions
Revisions
The PPF changed its view on the funding of the assets and liabilities it analyses from a comprehensive data set and as can be seen above, it’s view has changed quite radically between 2021 and 2023. There was an error in the assessment of “benefits paid” noticed by John Hamilton, admitted by Con Keating and restated here. I see this as an example of good minds working together to get to the bottom. This information should go to TPR, PPF and ONS.
The Hamilton revision is no more than a minor matter. What is important is that PPF made a major change to their methodology that has meant that they are now reporting different numbers (assets and liabilities) and therefor different funding positions. They explain this here
PPF statement on why it revised its methodology.
That there is so little certainty on method between TPR and PPF suggests that we are still where we need to be to answer the question put to me/us at the Parliamentary working session.
We don’t know the impact of LDI on longer term funding nor can we look at alternative strategies than those taken up and agreed with TPR by most DB schemes for most of the first quarter of the century.
We have to wait but we need to feel happy that an answer to how we value assets and liabilities and get to a position where we can set our strategies going forward. The DWP and Treasury are jointly looking at the way forward for pensions. I hope that they will get sight of Keating and get to meet Keating, Clacher and others who have done substantive work to compare ONS, TPR and PPF .
This is not the time to be tough on TPR, we should not create abrasion between parties. I think that TPR, ONS and PPF should meet with Keating and Clacher so that we have a standard methodology which allows schemes to get a better view of the way forward.
We need a clear view of funding. Sadly, I do not see that single view as available – this must be causing concern to those who are responsible for the funding of DB arrangements whether trustee, sponsor or regulator.
Let’s hope there is not a political game here, we do not want Government organisations caught in a cover up.
A further blog will follow with a video of Keating and details of the charity that Con is returning those in Afghanistan who speak as he does – to liberty. There will be another blog fro Keating and Clencher explaining their views- it will appear on this blog in the next few days.
The fundamental issue that the future liabilities of a pension scheme do not change just because the gilt or bond yield changes.
If the scheme is already invested in bonds those bonds do not magically produce more income just because the price of new bonds has fallen.
Gilts have been and are likely to be into the future the most volatile of the asset classes used by pension schemes, both on a long term and a short basis. This does matter, particularly in mature closed DB schemes because it is the realisable value of the existing gilt and bond holdings that will determine the capacity of the Scheme to pay the liabilities as they fall due.
Unless the scheme has been able to exactly match its bond maturities on a buy and maintain basis to its liabilities that realisable value is at risk – and that risk is increased as the market yield rises. But hold on! – The solvency measures used by TPR and PPF suggest the liabilities have gone down!
Pension schemes should be concerned about the Value at Risk of their bond holdings both on a short term and a long term basis. The Value at Risk measures promoted by the LDI salesmen focused entirely on short term equity movements – so the movement reflected in the once in 30 year one year measurement applied to equities is likely to occur every year in the 30 years to gilts and may also be even more dramatic if we take a 5, 10, or 15 year time horizon (matching the liabilities).
It may seem tempting to say now bond yields have gone up (to say 5.3%), the cost of securing the liabilities by an insurance company buy-out or buy-in has gone down. However the scheme is then realising a loss on its own bond holdings which would if the Scheme ran on its own liabilities would continue to generate the same income as they did before the rise in the yield. Also if the scheme is not fully matched the value of its other assets has not been affected and thus able to maintain the realisable value necessary to meet the liabilities as they fall due.
Is it value for money and is it reducing risk to pay the insurance companies 30 to 40% premium over the best estimate cost of meeting those liabilities? This is the assumption behand the TPR/PPF solvency valuations.