My email’s contain a number of interesting missives. Here’s one I will post anony-mouse -ly. The mailer will probably be cross with me for compromising him/her – if you were at the said event, maybe you remember! I wasn’t.
One thing got my goat on this. “Redirecting assets to DC”.
On a Mercer webinar on Tuesday I asked if they had any schemes where any surplus redirected to a DC section or scheme actually increased benefits. Did it just pay the employer contributions or some of it.The answer (as expected) was “no”. But that doesn’t mean it never happens. No one on the webinar countered that, it has always been said as a way of trying to get government onside. Pretending to do good on the real problem of adequacy. Spurious nonce nose.
I’ve never come across “nonce nose” before, I wonder if it was a spelling mistake- it’s now in my shot memory.
It came on a day when Schroders announced that it was using its DB surplus to pay DC contributions. I wonder if this is “nonce nose”. Here are extracts from Prof Pens with my thoughts alongside
Schroders scheme commits to running-on to use DB surplus for DC contributions
Scheme will use around 10% of SRBS surplus per annum to help fund DC section
This sounds very noble, is it increasing the DC section (very high already) or is it saving the P/L on the DC pension contributions?
30 January 2025• 3 min read Thanks John!
Schroders has committed to running-on its defined benefit (DB) pension scheme – leveraging a portion of the surplus to partially fund its defined contribution (DC) commitments.
Eh? This emanates from the Schroders Finance Department. What does leverage mean? It sounds like Schroders are using DB pensions to pay DC contributions. I am pleased this means that Schroders aren’t selling their scheme to an annuity provider, that sounds like an advertisement for an investment house and merchant bank.
As part of the move, the Schroders Retirement Benefits Scheme (SRBS) trustee will be able to use approximately 10% of the DB section’s surplus per annum to support DC members’ funding, operating within key guardrails to ensure the DB pension remains in a healthy position.
This looks and sounds like an advertisement for Schroders. But all that is happening is that the money not needed to pay DC contributions is going to shareholders
The guardrails that have been put in place encompass regular funding level and covenant checks, as well as a mechanism to recoup contributions should the DB section’s funding level deteriorate.
So we should feel good about Schroders still having a responsibility for its DB pension , that is indeed better than giving both the upside and downside to an insurer. But hang on, isn’t this Schroders an investment bank that believes in 100% investment, 100% secure. Doesn’t that economic miracle happen from growth in funds arising from good investment?
Aon and A&O Shearman provided actuarial, covenant and legal advice as part of the agreed trustee and sponsor mechanism.
I feel overwhelmed for the community of advisers who support Schroders in this time of trial.
Advertising continues as we are offered the happy coincidence that this financial rearrangement coincides with a Government announcement that it would like pension schemes to do something, not least with the huge contribution made to Schroders’ workers pensions.
The move comes as prime minister Keir Starmer and chancellor Rachel Reeves announced on Tuesday (28 January) that the government would ease restrictions on how well-funded DB schemes could use their surplus.
Schroders chief financial officer Meagen Burnett said: “We are delighted to join the growing list of FTSE 100 companies that are running-on and using their DB surpluses to help deliver continued pension security to our people and growth to the UK economy.
“Schroders has worked closely with the wider trustee group to deliver a structure that works for all stakeholders. The current funding position is testament to our strong investment capabilities across the wider group in delivering appropriate risk-adjusted returns for pension schemes.”
And there was I thinking that Schroders might find them short of a few bog in retirement. I assume that SRBS stands for Schroders Retirement Benefit Scheme …
SRBS chair of trustees and BESTrustees professional trustee Lisa Mundy said: “Utilising a DB surplus when the DC section is within the same trust can give rise to many options for improving member and sponsor outcomes.
There is another 300 words detailing the various strategies/products that Schroders have adopted all of which have done remarkably well and are available from a Schroders salesman or well-“informed” adviser near you. You can read these remaining words here.
Let’s have some common sense here. Let’s go back to the opening comments of my correspondent and ask ourselves just what kind of impression this advertisement for Schroders has on his/her approach to those in the privilidged position of Schroders , its staff and its pensioners?
If we want to applaud pensions, let’s hope that pension schemes use the opportunity opening in front of them to provide DC savings plans with the pensions that the DB plans have always had.
With valuations at over 30% above long term trend what fall in the market would it take for the surplus to be come a deficit?
Observation from study group this week
“The latest Fed tightening cycle, since 2022, has been the sharpest ever (a tightening of 5.25%), the third longest (34 months), with rates staying at the peak for 14 months, matching the cycle of (May 04 to Aug 07). The yield curve (the spread between 10Y and Federal funds rate) has been inverted by 0.5%, reminiscent only of the cycles in 1971-81, although the 10Y has been relatively low because of a consistent downtrend,
The gyrations (max to min) of the S&P 500 have reached a pinnacle of 38% in the current cycle. The long-term (LT) valuation of equities hit 54% in Dec 2024.”
What does this imply for equities?
I am a (very small) Schroder shareholder and I am not at all happy about this!
Effectively the company is giving monies from a pooled fund which can be used for the future benefit of the company into the individual pension pots of the current employees.
If the funds continued to be held in the pooled fund, the company not only benefits from the investment return on the surplus; has a contingent asset that could become available to the company in a crisis situation; or alternatively used, together with future employee contributions; to provide much more cost effective income in later lives for its current and future employees through re-opened DB pension arrangements. The company also retains a level of involvement through consultation on the Statement of Investment Principles on how the pooled funds are invested for the benefit of the company, all past present and future employees, and the wider community (productive investing, sustainability, and ESG) which becomes secondary in the consideration of the individual member pots with their increased administration costs.
Under IAS19, Schroder’s profits will be reduced by the full amount of the funds transferred to the individuals’ pots, even though they may held in the same scheme. At the same time the interest credit from the surplus will be reduced.
Doesn’t sound like effective asset management to me!
The penultimate paragraph should have read:
Under IAS19, Schroder’s profits will be reduced by the full amount of the funds transferred to the individuals’ pots, even though they may held in the same scheme. The Balance Sheet asset will be reduced by the full amount of the funds transferred and the interest credit from the surplus will be reduced in all future years.