I am sorry not to have made it! I was pressing away on my iPhone as the Queen Elizabeth train took me up from Slough to Farringdon in London. But it would not obey my instructions.
Thankfully, I have the opportunity to watch who appeared and what was said and by this opening shot I suspect to hear from some fine speakers in the audience as well as Laura McLaren, Graham Jones and Pension PlayPen’s host Steve Goddard.
I will be listening to the session over the next hour and hope you will do the same!
McLaren
Jones
One thing that struck me about the funding code as i listened to the an excellent walk through from Laura and Graham was and is that language is important. Somewhere along the line the term Dynamic Discount Rate has evolved to reflect an approach to calculating liabilities.
A better term would be Asset Derived Discount rate, or ADD for short.
And while i am on the topic, it is hard to believe that an ADD approach cannot be encompassed within a Fastrack approach, as by it’s very nature it draws the A and L in ALM together
In an Actuarial Post article, WTW’s Gareth Connolly says this:
“It is worth remembering that the DDR approach is not new. For example, many schemes such as those that are open and / or immature have used discount rates based on the expected return of the asset portfolio, with the discount rate reviewed at each valuation.
“Furthermore, the existing funding regulations explicitly include an option for the discount rate to be chosen taking into account ‘the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns’ [which is consistent with the 2005 Scheme Funding Regulations which were brushed under the table top of yesterday’s ‘debate’ about TPR’s Code].
“However, the primary focus of … is the use of the DDR approach for schemes where the asset portfolio consists of investments with a high degree of contractual cash flows that are similar in nature and profile to the expected benefit outgo …”
This latter approach was the one emphasised in yesterday’s ‘debate’, to the exclusion of the alternative in the Regulations.
Hyman’s presentation assumes that 80% of schemes can already meet the low dependency funding level resulting from a discount rate of gilts +0.5%. In fact our calculations show that only 47% 0f schemes meet that hurdle at September 2024 and schemes in deficit have deficits totalling £91 – £92 billion – money that will have to be found from corporate sponsors – reducing their ability to invest in the UK by that amounts.
I fully agree, and TPR actually understand this, but they zealously execute their mandate to over fund schemes at the expense of pulling many £bnx of money / contributions out of the real economy.
Reeves /Starmer’ pleas for growth can only come to NOUGHT without an open understanding of the implications of the new funding code, and its re-alignment to with new growth directed objectives.
If the TPR driven policy objective is indeed ( I say) to overfund these schemes regardless of the systemic effect on our economy, then let’s have an open conversation about that with views as to whether that is the best way to allocate capital and grow an economy.
So much for TPR’s assertion that 80% of schemes can fast track “at no additional cost”.
TPR’s “impact assessment” has no credibility whatsoever.
https://assets.publishing.service.gov.uk/media/62dfa3bd8fa8f564a4e07cae/impact-assessment-consultation.pdf
TPR’s next Business Impact Target report is also unlikely to include the latest DB funding code which applies from 22 September 20
Picking up on the true level of deficits or surplus in DB schemes at the moment.
If you consider the movements in the 20 year Gilt Yields (purely as they are to hand but other durations in the curve showed similar movements)
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%
The low dependency funding requirement (gilts + 0.5%) has moved from an evaluated investment return of 2.22% at 31st December 2021 to 6.13% at 31st December 2024 to determine the realisable value of assets required to secure the scheme’s future benefits.
In 2021 this hopelessly over-estimated the value of assets required, leading to employers and other scheme sponsors to make additional contributions which now appear to not to have been required and worse still have now disappeared from the UK economy in the dividends share buy-back by the insurers.
In 2024 the opposite appears to be the case, and while the TPR and PPF are trumpeting the increased levels of surplus, it does appear that the analysis may be considerably under-estimating the assets required to secure the benefits. If a scheme doesn’t achieve the 6.15% investment returns the the employer will be faced with large future demands for further deficit repair contributions. Further an employer is unable to pull money back allocated to individual DC pots (whether within the Scheme or not) to meet these requirements.
As I have posted before I strongly believe we need to ditch gilt yield based valuations when we are talking about scheme surpluses or deficits to be funded or to be distributed:
https://henrytapper.com/2024/11/13/should-pension-schemes-ditch-gilts/
https://henrytapper.com/2024/11/14/should-pension-schemes-ditch-gilts-part-two/
May I suggest PensionsOldie considers a 2020 webinar chaired by Debra Webb for the actuarial profession.
Con Keating and colleagues also made written submissions which are recorded and answered towards the end of the transcript of the meeting.
https://www.cambridge.org/core/journals/british-actuarial-journal/article/actuarial-valuations-to-monitor-defined-benefit-pension-funding/D669D89B27F3D2B482010415358DA5DA
I think PensionsOldie is advocating a “budgeting” method of discounting, whereas the profession has rightly been considering how such a method sits alongside the need for better solvency reporting (using a risk free rate and a “matching” approach) to DB scheme members and sponsors.
My only observation on the wide-ranging discussions, which are supported by earlier research papers from Chris Daykin, Chris O’Brien and others, is a failure to incorporate the value of the PPF underpin for insolvent schemes.
Chris O’Brien at one point admits to not understanding the details of PPF valuations, which I find surprising.
TPR seem to me to be trying to merge the “solvency”
and “budgeting” bases.
It was also depressing to read that “The Accounting Standards Board in the UK has said that they think discounting should be at a risk-free rate”. As if accountants haven’t meddled more than enough already in corporate and trustee financial reporting of DB pensions!
from 22 September 2024.
TPR’s latest BIT only covers the period to 16 December 2022 so at this rate we won’t get the 2024 BIT for another two years …
https://www.thepensionsregulator.gov.uk/en/about-us/how-we-regulate-and-enforce/business-impact-target
Why is there such an emphasis on gilts? It seems to be problematic to use it for a low dependency discount rate for a number of reasons. (Does the code actually say gilts+1/2% so baldly? I could not find it.) It is supposed to be risk free but if it is market based it is anything but as Pensions Oldie has shown. The gilt yield is very variable. And it is hardly credible to call it the time value of money.
It leads to misleading valuations if the investments are not in gilts especially when gilt yields are low. This has been a major issue during the period of low rates monetary policy after the GFC (which is now thankfully over). This led to a huge avoidable loss of economic welfare as schemes closed, and working people lost rights to DB pensions, simply due to using the wrong discount rate.
It also leads to derisking investing in bonds which is inconsistent with the approach needed – investing in real assets – to promote economic growth,
I have greatly enjoyed reading this thread; Dennis’, Byron’s , Jnamdoc’s, Adventurousimpossibly and Pension Oldie’s have created a body of work which is of value. I hope that civil servants and politicians will read this and recognise the depth of independent thinking that underpins this thinking.