The surplus issue , like Mansion House speeches, does not open doors in the way that Pension Freedoms did to the retail “pension” market. I put pension in italics because George Osborne released retirement savings from the last link to pensions – the requirement to annuitize the pot.
Mary McDougall, writing in the Financial Times points out that the surplus in UK DB pensions is ephemeral, it lasts as long as favourable gilt rates and when gilt yields fall, the surplus falls away. The point is simple, pension strategies should not be based on such ephemeral advantage. For many years I was educated by Con Keating for whom there was an underlying return that schemes should set.
I was reminded of this when a DB trustee chair explained that the scheme set out year on year to return a positive investment return and has done so throughout the 20th century. He explained that he was not keen on managers that thought they had done well for beating a market that fell 29% by returning minus 27%. That scheme now has a £130m surplus , more than 10% over funded. It avoided the worse of LDI carnage by not borrowing to increase gilt holdings.
Common sense rather than concept is what is needed, The concept of “de-risking” drove many DB schemes to be conceptually well placed for October 2022, only for them to find themselves without the liquidity to meet the calls of those who lent the money. Concept failed to deliver what common sense saw as obvious.
What has happened to schemes since 2022 has been the valuation of liabilities has decreased (making the funding target lower) and the value of the scheme’s assets has increased. But this change has no reference to the underlying growth in value of the assets and doesn’t mean that people like me and maybe you are likely to die soon. Con’s target return assumed that people would live longer and was a measure of whether there would be money on the final day of the scheme to meet its obligations.
Here is the point, one I’d like Mary McDougall of the FT, to promote.
It’s not that surpluses are windfall benefits that can be spent while they are around. What is worth promoting is a long-term investment strategy along the lines above. It is a strategy that looks at opportunities to invest in fast growing assets where the money can accelerate growth over the long term. Pension fund managers need to be comfortable that they are investing in such assets while accepting that assets may be mispriced – and liabilities too.
This does not mean being oblivious to the numbers, but the numbers are simply an indication of the market’s mood and these moods may be ephemeral. This is a message that needs to be encouraged within the Pensions Regulator. This is not the time to knock TPR around for following ephemeral concept rather than fundamental strategy.
The Bank of England has adopted a strategy of purchasing 100% of the scheme in gilts that match what it needs to pay in future years. This is where a concept leads to a contribution rate of more than 50% of salary.
This is reasonable for BOE but not for many others! It may be what TPR considers the ultimate de-risking strategy and one that it would like employers to agree to but it ignores the speculative approach that drives companies to be successful. Most companies want to see contribution rates based on investments of past contributions meeting part of the cost and expecting that return to continue.
This is where the concept of “de-risking” clashes with the needs of the company (unless the company is the Bank of England). Many companies have been led away from the upside of paying pensions to staff at reasonable cost. De-risking has led companies to agree for their pension scheme to be bought out by insurers with payments equivalent to the pension , being paid as annuities.
But this is an expensive way for a company to dispense with what could be considered an asset. If companies had an attitude towards a pension scheme that was based on paying staff with 100% certainty, they might start looking at investment as a positive, not just for members but for the company too.
This is why the target of getting a pension scheme surplus is no bad thing. It is something we could and should aspire to – if we are involved in funded occupational pension schemes
If we are only indirectly involved then we should be encouraging those who are to step up and aspire!