First the advert.. Tuesday 10.30 am event ; free ticket at the bottom of the blog.
Having made a mistake and locked myself out of the excellent session led by Pensions for Purpose, I’m not going to do it twice!
If like me, you failed to make it to the game changing that may happen with DB pensions. If we listen to Pension Oldie we may end up with more DB plans. He wants DB plans to reopen when we realise the true value of DB (and CDC) plans and compare the value for money they provide relative to DC plans.
If we listen to Con Keating we will recognise that surpluses are ephemeral and what is needed is long term funding of pensions through investment rather than the huge sponsor contributions paid to funds for liabilities that appeared huger than today. His suggestion is that Government intervenes to make sure that surpluses (and other assets in “pensions”) are subject to exchange control restrictions, ensuring that UK pension money stays invested in the UK.
You might hear from Anthony Barker who spoke last week about the arguments of who gets the benefit of surpluses. Others may argue in future events (such as Tuesdays) that fiduciary obligations are to members not to sponsors (not all DB pensioners have the golden cloak that many argue’s in their wardrobe).
Bobby Riddaway didn’t see pension surpluses make it to the top of the trustee 2025 agenda. The new funding surpluses require future responsibilities to provide for future expenses, this hardly looks like the Government disrupting the current antagonism towards taking risk at the Pensions Regulator.
Bryn Davies, pointed out that unions have historically brokered deals on surpluses and how they are returned to members and sponsors. He pointed out that without unions , there would be less broking, the money went just to the sponsor. Bryn sees this as problematic and a big debate when the Pension Bill is published later this year.
William McGrath argued that the fiduciary duty that he saw Bobby Riddaway argued for , could be released from their current obligations. For him the investment targeting against gilts (+ 1-1.5%) is not enough, the big story is can trustees get big investing into real assets with gilts + targets several times those current in place.
If you cannot access the video via http://www.pensionplaypen.com, you can access it here. It was well chaired by Steve Goddard with superb steering by Laasya Shekaran, Director at Pensions for Purpose
I hope that we will see many of the speakers who contributed to these debates, continue to do so in future debates and indeed to the PLSA events. I am delighted to hear that John Hamilton , Chair of Trustees at Stagecoach, will be speaking on the Wednesday (12th March). The Pensions Minister will be speaking at 1.45 pm on the 11th March. I will be reporting on both events.
The PLSA is not cheap but Pension PlayPen can be; because you have read here , you are entitled to a free link to the Hymans event , advertised above
Free link to the event on Tuesday 10.30 am with Hymans
Thank you for the “nod” again Henry!
It is my strong belief that a very easy win for UK Economic growth would be a radical re-appraisal of the legislative and regulatory framework surrounding occupational pension provision. For too long (at least since 1993) this has been entirely focused on damage limitation exercises and no consideration has been given to what the system should be trying to achieve.
Given the current basic taxation position of:
Contributions paid by employee – paid out of income before tax
Contributions paid by employer – an allowable cost for Corporation Tax
Investment performance by the Pension Fund – Not assessed to tax
Benefits paid out to Members and dependants– Subject to tax (except a capped pension commencement lump sum)
I believe the objectives of any occupational pension system should be:
For the individual:
The maximum predictable income in later life or permanent employment incapacity protected against inflation, plus appropriate post mortem provision for those dependent on the individual.
For the employer
The lowest predicable cost consistent with the individual objectives for its employees..
I believe legislation and an appropriate regulatory regime should seek to meet these apparently conflicting objectives.
I believe that defined benefit pension provision offers the most advantageous route towards those objectives for both the individual and the employer.
Further legislation and regulation should seek to fulfil the objectives and not to hinder them. Consider the low dependency funding objectives set in the DB Funding Code (Gits + 0.5%). If we assume a 20 year liability profile this sets widely differing funding objectives depending entirely on the date of valuation:
31st December 2021 1.72%
31st March 2022 2.36%
31st December 2022 4.58%
31st March 2023 4.42%
31st December 2023 4.69%
31st March 2024 4.93%
31st December 2024 5.63%
Consider the employer with an “End Game” low dependency deficit recovery plan based on a 31st December 2021 valuation. At the 31st December 2024 valuation it discovers that the deficit was over-stated. Even worse, the pension scheme may have attempted to migrate its assets to match the valuation assumptions under an LDI policy. Has this allowed the employer to thrive and grow?
In an open DB scheme those variations can be smoothed out and any apparent shortfall met out of fresh employer (and employee) contributions and the investment return from an investment policy potentially unconstrained by regulatory requirements. Similarly any apparent surplus remains recoverable by the employer through the “balance of cost” funding basis.