I am sorry not to have been at or publicised this brilliant session. I didn’t publicise it due to a failure to get into my own website and I didn’t attend due to some medical matters,
Here is a recording what I (and maybe you) missed.
Laasya Shekaran, Director at Pensions for Purpose was in charge. She probably think I’ve gone off her – precisely the opposite – what a great talk!
The big topic in the pensions industry over the past week has been DB surpluses, with the UK government announcing they are going to introduce new measures to allow for surplus release within DB pension schemes
In this presentation Laasya and the eminent audience discussed:
- How DB surplus could be used to drive better outcomes for members, society and the environment
- What this change in surplus regime could mean for investment strategies – including impact investing, illiquid allocations and endgame decisions!
- How we can ensure existing DB members are protected… while also considering the futures of DC members
- How this fits into the broader pensions and policy landscape
Laasya has a BSc in Maths from Warwick University and before joining Pensions for Purpose, she was a Senior Investment Consultant at LCP.
Laasya
Why, oh why are we spending all this time, including our Government’s time discussing something that doesn’t exist? IF a DB pension scheme’s sponsor takes money out of that scheme, said sponsor CANNOT spend that money, whether to support the finances of the company or the Government. BECAUSE THE SPONSORING COMPANY MUST KEEP ENOUGH MONEY AVAILABLE TO PAY THE DB PENSIONS UNTIL THE LAST PENSIONER DIES! WHY IS NOBODY LISTENING???
How much money kept locked away is Enough?
The problem being that valuations based on negative real gilt yields required employers to put ever more money into the locked away pool for the outstanding DB pensioners. As those pensioners die, the money locked away for that individual becomes available to pay the pensions of the other members. As this runs on you get a pool that increases with (hopefully) investment returns above the inflation of the pensions but a diminishing pool of pensions to be paid. Is it then in the interest of the Members and society in general to keep that pool locked away for potentially up to 70 years, then suddenly the employer or its successor gets a windfall gain?
Alternatively the pool could be used to increase the benefits of the existing Members and also reduce the future employment costs and hence the longevity and potential growth of the business by using part of the perceived surplus funds to future the employer’s employment/pension costs. What is at issue is how do you determine at one point in time how much will actually be required to be kept in the general pool and what will be recovery options if that estimate proves to be wrong. An open DB pension scheme with regular new contributions being paid in is essentially self regulating and the time horizons for any required correction can be extended. Whereas if assets are moved out of a general risk shared pool into individual DC pension pots, whether in the same scheme or separately, any underestimate of the required pot size will need to be immediately made good as soon as it identified. The same applies with a single one off surplus distribution to the employer or a cash bonus payment to Members.
To me this is the substance of the current debate.
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