Pension Oldie has written a comment on this blog and I would like to bring it to your attention. I have met Pension Oldie, he is of the kindest but strongest nature, I would like his thoughts to be properly heard so I have converted his comment to blog so it can be properly read.

The gentleman to the right remained committed to the cause thirty years after the war had ended.

I believe that Oldie should be similarly  honoured for keeping the flag for good pensions flying.

As I have pointed out before,  re-opening to DB accrual at an affordable accrual rate is the obvious solution for any company retaining responsibility for a DB pension promise whether in surplus or in deficit, whether existing assets have been used to purchase a bulk annuity product or not.

The assumption of additional risk the company is taking on is entirely a one sided analysis based on a single base point measurement of a highly volatile market determined factor of little fundamental relevance which effectively diminishes the impact of all other factors. The key determinant of success will be whether the pension scheme will achieve an investment return which outstrips the inflationary increases to benefits for the foreseeable future. The reported investment returns of one mid size open DB scheme – cash flow positive because the contributions paid in (both employer and employee) have inflated faster than the pensions paid out.

“The investment returns achieved by the Scheme compared to CPIH Inflation have been as follows:

Investment Return Inflation (CPIH)
1 year to 31st March 2024 13.8% 3.2%
5 years to 31st March 2024 6.3% p.a. 4.2% p.a.
10 years to 31st March 2024 7.2% p.a. 2.9% p.a.
15 years to 31st March 2024 7.5% p.a. 2.8% p.a.”

I do not believe these figures are untypical of pension schemes who have not sought to hedge liabilities against gilt yields.

Lets stop this nonsense about trying to link the assumptions about the future to the past. This could most easily be achieved by setting a single percentage value for the assumption about the future and have a discussion about how appropriate that figure is, e.g, using the figures above.

Should we assume future inflation should be 2.8% or 4.2% or just say 3.5%

Should we then discount the future liabilities by 4.9% p.a. (31/3/14 Gilts + 0.5%) or 1.4% p.a. (31/3/21 Gilts + 0.5%) or just say 4.5%

to determine the capital value of the assets the Scheme needs to meet the pension promises on a low dependence basis?

Having done that the Trustees and Employer can then plan how to build the assets up (using both employee and employer contributions plus investment returns) to build a sufficient surplus of assets to meet risk margins.

Once that risk margin has been reached the employer could then scale down its “balance of cost” contributions and thereby reduce its future employment costs.

To me this is more likely to result in sustained economic growth than a one off surplus distribution, probably being distributed to current shareholders by way of dividend or share buy backs (in many cases to shareholders outside the UK), plus a fixed commitment to pay elevated DC contributions likely to provide a much poorer pension income outcome for employees.

Jnamdoc