It is necessary to get on with it. We cannot regulate by de-risking, we must accept insure against calamitous failure (both by sponsors and by trustees). We have done so with the Pension Protection Fund. The PPF is strong and should be encouraging investment as a back-stop. The Regulator should not be rewarded for nothing happening. We have no CDC schemes but Royal Mail, no substantial new DB plans have appeared in the past 20 years. Attempts to invest in DC are met by the worry that people will call on their pot from as early as 55. There is no thought that a 55 year old has at least a 30 year prospect of needing a pension.
We need to look at what defines a DC scheme. To me, the only thing that should define DC is that the employer pays a set amount, typically a percentage of pensionable pay into the scheme. That excludes schemes which are targeting paying a sum where the contribution is determined by what is needed to meet liabilities. DC schemes are required to demonstrate contributions are paid of 3% from the contributor, 4% from the saver and 1% from the Government. Right now, the Government are in default on the 1% (but that’s another story).
There is no rule that says that DC schemes should not pay pensions, no rule that says that a DC scheme should pay benefits with the same certainty as a DB plan. The concept of a with-profit pension where the promise is 100% certain is a real insurance. Even if it is paid from a 100% invested fund it is a pension so long as there is capital behind it to be considered certain.
I have been learning about this from my friends who read this blog and from those who I work with. The DC scheme can play a DB benefit. The pensions industry and those who are looking to regulate it, must focus on allowing DC to sit within the auto-enrolment rules as DC schemes , even if they pay DB benefits.
The Pensions Regulator must be comfortable that schemes can be DC for employers but DB for members. The members must have the certainty of a defined pension with a certainty equivalent to an annuity, the employers need not worry about sponsorship of this promise.
This means regulators stopping focussing on de-risking and starting to think of DC as a means to get lifetime investment back into the pension system. Instead of worrying about not being seen to make a mistake, they must work with people who want to provide both insurance and investment through pensions paid to anyone who can join such a scheme.
This may sound a little strange and undoubtedly it will be to those who were not working and saving in the 1980s and 1990s before we went into lockdown. Because of Maxwell and a few other rogues who took advantage of a system that relied on “trust” we had people stripped naked on Brighton beach. But Altmann, Young and others of the generation above me put the backstop in place so that investment could continue.
But investment hasn’t continued.
But like a computer nerd who buys too many means to protect the computer, we have created protection after protection till our system is running slow it doesn’t do the job.
Funded pensions in the private sector are now disinvested to a point it can be labelled “de-risked”
We have closed the door on the future, deprived our pension schemes of the oxygen of growth – equity and real asset investment.
As a result, we are the least productive of electricity, which drives everything, than our immediate neighbours
We must accept that for the 25 years that the Pensions Regulator has been in existence, we have blown it for the economy, for those who work and for those who will stop working and then rely on their pension, or their retirement pot.
Let us listen to Rachel Reeves, she is right. We have blown it and this is not about politics, it’s about culture and appetite. The Britain that developed in the 19th and 20th centuries. We must stop focussing on budgets and start thinking about what can be done to get us back on the trend we were following before 2005. 2005 is an important date for a lot of reasons, but especially for those who work in pensions and want them to become what they were “Britain’s economic miracle”!
Where was the miracle?
The trajectory has changed and the 25% lost and there are still losses to be quantified. StIll no plan to deflect the trend upwards.
Here is one suggestion, from my own portfolio, of where to invest a thinking pension fund. One application will save 20% of energy costs of a server farm. If anyone interested email me
mather.john@gmail.com
https://www.eetimes.com/solving-ais-power-struggle/
Are comments working? 20+ minutes to arrive is not usual? And still not posted
I will repeat the positive suggestion of the type of investment that will deflect trend upwards I need to declare an interest as I have this in my own portfolio
https://www.eetimes.com/solving-ais-power-struggle/
One application saves the typical server farms 20% of energy costs
I think the main focus of the message should be to the Boards and in particular the Finance Directors of British companies. Why are they unnecessarily increasing their future employment costs by shunning DB pension schemes in favour of DC arrangements.
If a DB Scheme is funded to the extent that it can meet the buy-out cost, it can be invested “productively” to generate additional surplus over that required to pay the benefits as they fall due. However if you use that surplus to fund individual DC pots, you are losing the assets in the pooled fund that create further surpluses to fund the current and future pension promises by the employer. This is the case whether the DC arrangements are within the same pension trust as the DB scheme or whether the surplus is distributed back to the employer and then used to pay into individual employees’ DC pots. The tax effect is also neutral between these two alternatives.
It is a shock to many FDs to find that if the pension scheme assets are transferred from the pooled fund to individual DC pots, under IAS19 the full “cost” of the DC contribution has to be taken to the P&L A/c in the year of the transfer, whereas if the surplus is left in the pooled fund it will generate an interest credit to the P&L A/c. The same applies on a cash flow basis, the investment income from the pooled fund can be used to pay the company contributions in respect of company and future employees, not possible if the assets are in individual DC pots.
I am aware of at least one DB scheme (incidentally already fully funded on a solvency basis because it has remained open) which is considering accepting transfers in from existing members DC pots at or just before retirement to increase the Member’s DB pension benefits. In that way the Employer gains the investment return on the additional assets to pay the future pension costs while the member gains the guarantee of the DB pension rights (with or without discretionary benefits) without having to pay the premium and additional administration costs associated with pension benefits from their DC pot whether annuitised or in drawdown. It is the Employer who meets the administration costs of the DB arrangement whether directly or by utilising the Scheme surplus assets.
As you note, similar possibilities are available to a mastertrust, but there it is the mastertrust provider not the employer who can reap the ultimate reward.
If Rachael Reeves does seriously want to achieve growth, she should recognise that this is most likely to be achieved by smaller companies growing into larger companies. In her challenges to Regulators she needs to consider whether regulators in the pensions area are discriminating against smaller companies, particularly those with existing DB or those who wish to open new DB pension schemes.
An interesting point of view. I have learned a lot from you Oldie! Thanks
This is very useful but calls for action are required Why are members of workplace DC contributions used when an agreement for salary sacrifice would add nearly 30% to the members investment or examples of the type of investment that not only addresses climate but actually gives entrepreneurial rates of return. See link above.
When will the industry wake up to the fact that lazy assets give lazy returns. As for the hope that Plc management will come to the rescue read Andrew Smithers on Coprporate greed and shareholder value and returns.
When the average FTSE finance director earns the same as the wage of the average employee in less than 10 days is the reality. and needs fixing.do the institutions ever use their vote to hold “remuneration committees” to account?
According to recent data from Equiniti, the average AGM vote in the UK in favour of a remuneration policy is around 88%, with most companies seeing approval rates above 70%, indicating a significant majority of institutional shareholders typically supporting the proposed executive pay structures, John.
I suspect the majorities in US votes (with notable exceptions like Tesla now going through the courts) are as high or even higher.
But AGM voting is such a blunt instrument. We may wonder what dialogue, if any, passes between selected institutions and internal management between meetings?