Mary McDougall has written an amusing and caustic piece asking whether our Prime Minister has quite got to the bottom of what this blog calls “ephemeral“. The surpluses that the Prime Minister reckons at £170bn could be twice that by adjusting the “gilts +” rating that allows us to measure assets. If TPR accepts it has got its sums wrong and the ONS have got theirs right, then the surplus is rather more ephemeral than numbers 10 and 11 Downing Street reckon it.
As we point out “surpluses are ephemeral , beating targets should be fundamental.
Mary McDougall correctly points out that the fiduciary duty on trustees does not mean all the money excess to the need to pay members is to be paid to DB members. Many examples stretching back to a 1984 Mineworker Pension debate are discussed. Lawyers from legal firms such as Freshfields deliver their opinions and Linklaters are hauled in to deliver their opinions and we end up realising that Starmer is up against legal technicalities that will stop us doing anything (if we can’t break loose).
Of course there is another way to look at pensions and that is to consider them as a means of long-term growth that ride out short term problems with determined strategy. This is what Keating means by “targets being fundamental”. I hope that the readers of this blog are able to get their points across and are not drowned out by legal technicalities. I know the senior people of some of the pensions in lockdown and some are very proud of themselves, some of them ashamed of mistakes of their scheme (especially in the latter years of LDI).
Keating comments on this blog
The Prime Minister’s £170bn of surplus appears to be based on TPR’s estimate of schemes in surplus on a low dependency basis – £162 billion. Our estimate of this figure is less than half that of TPR, £71 billion. According to TPR, schemes overall have a surplus of £137 billion, which we believe is actually a deficit of £21 billion.
The ones that are in lockdown and proud are pleased they are on their way to buy-out, those that are ashamed recognise that their opportunity to benefit members, sponsors and the country was lost in the first 22 years of this century when we gave up investing and embraced de-risking.
I do not think that handing over your DB pension scheme to an insurer is anything to be proud whether more than £1bn or less than £10m. I have made this point earlier this week. Managing fiduciary duty means taking a forward look.
This week Lloyds Banking Group restated its surplus downwards. The provisional report on which TPR make their estimates of surplus are not always accurate. Take the case of Lloyds Banking Group.
LBG’s results also revealed the bank had seen a fall of around 17% in its defined benefit (DB) pension scheme surpluses.
The bank sponsors some of the UK’s largest pension schemes – including the Lloyds Bank Pension Scheme No. 1, the Lloyds Bank Pension Scheme No. 2 and the HBOS Final Salary Pension Scheme – with combined pension assets totalling some £30.1bn at 31 December last year.
LBG said it had seen its net surplus position fall from £3.5bn at the end of 2023 to £2.9bn at the end of last year – a fall it attributed to negative market impacts, with scheme assets falling from £33.7bn at 31 December 2023 to £30.1bn at the end of last year, while liabilities fell more slowly, from £30.2bn to £27.1bn, over the same period.
It said that, following completion of the triennial valuation of its main DB pension schemes as at 31 December 2022, there would be no further deficit contributions for the current triennial period (to 31 December 2025).
Surpluses are ephemeral, what is needed is to beat funding targets over time.
I hope that when they come to review DB funding, this Government will call on some of the people who comment and blog on here for fundamental advice on how to go about managing pension schemes. Those who’ve managed pensions a lifetime make better policy advisers than pension lawyers – with due respect to Starmer’s profession.
The Prime Minister’s £170 of surplus appears to be based on TPR’s estimate of schemes in surplus on a low dependency basis – £162 billion. Our estimate of this figure is less than half that of TPR, £71 billion. According to TPR, schemes overall have a surplus of £137 billion, which we believe is actually a deficit of £21 billion.
As for Lloyds, they appear to have done very well relative to the performance indicated by the PPF – Lloyds assets down by 10.6% and liabilities down by 10.1% – while PPF has assets down by 11.1% and liabilities down by just 7.7%.
There definitely is a bit of “magic money tree” thinking in the Government when they look at pension scheme asset figures.
In the real world trustees are reluctant to give up what experience has indicated may be ephemeral surpluses and employers are far more interested in investing assets to reduce their future employment costs. Unfortunately many employers are being misled into thinking they can do this through using surpluses (if there are any) by transferring assets out of the pooled (DB) fund into the individual (DC) pension pots of their current employees (whether in the same pension scheme or not). Employers doing this lose any future benefit from the asset pool their (and the members) contributions have built up and hopefully invested for future returns and cash flow and not merely to match some volatile and irrelevant liability measure.
The most efficient way to utilise pension schemes surpluses is to use them to part subsidise future DB pension rights in a pension scheme in which the employer retains a financial interest. In that way the employment costs are reduced both in cash flow and profitability terms and thereby creates a sustainable environment for the long term growth of the employer and through that of the economy.
As you have been promoting, Henry, the most important objective is to get pension scheme assets to provide pension income and to give the security of a secure and regular income to allow pensioners to spend and not hoard that income.
As a naïve, younger trustee, and based on investment cash flow modelling, I once upon a time believed that open DB schemes would be “in deficit” for perhaps the first 20-30 years of their operation, only tipping into “small surplus” thereafter.
Believing that investing should do the heavy lifting, I also thought naïvely that trustees shouldn’t make unnecessary claims on additional cash flow injections from the sponsor if the investment portfolio was capable of delivering sufficient income within prudent margins of safety.
Hence “small surpluses”
at most.
Then along came one-size-fits-all regulation and an actuarial obsession with “matching” and “de-risking”.
Margins of safety were ignored, or overridden, and a new generation of trustees seemed to think “large
surpluses” were the norm/normative targets.
You could argue this transferred the margins of safety from investment cash flows to the pension scheme balance sheet, but either way the die was cast and DB, for the majority, died along with it.
These comments are making me recover my sense of possibility! ~Surely we can do better than we have done!
The idea that so-called “pension fund surpluses” provide a key to economic growth is nonsense. There is no reason to treat one part of global pension scheme assets any differently from the rest. To the extent that the money held in the form of pension assets can promote growth, and that’s open to question, it’s the global assets that have to be mobilised. Refunds to employers would be a sideshow, at best.
Agreed its not really about the surplus, but is politically easier to rescue and redirect the surpluses into some kind of growth at least, rather than have that excess languishing under the deathhold of a funding code guided G+0.5% mandate. No GDP no pension.
Pick your period on Lloyds. Inconvenient to mention, but I’m still unsure how losing £20,000,000,000 of scheme assets FY21–>FY22 can lead to any sort of success?
Maybe a sideshow, but in some of the LGPS with funding levels up to 207%? Refunds could go further than mere contribution holidays.
This is where the rubber is about to hit the road …
Given the article is in the FT, we can assume this is a feeder from HMT, and indicative of where they want opinion and the courts to go in order to liberate the languishing surpluses (accepting that part is all definitional – although one thing is certain, on a system wide basis we ain’t paying all of these pensions from current levels of indebtedness and sclerotic growth).
7 years in jail – no thank you:
Regardless of many good intentions and nudge psychology, they won’t cut the mustard and this will all come to nothing at all on the use of surplus or redirecting Schemes to growth without clear amendments to S58 PA2004 – that’s the bit of the law that says anyone who:
“does an act or engages in a course of conduct” (oh, and BTW that includes “a failure to act”) …”that detrimentally affects in a material way the likelihood of accrued scheme benefits being received” can end up with 7 years in Jail and, at the sanction of the Regulator (not the Courts!) a fine of £1m!
Yes, there is a ‘reasonable excuse’ defense that could be raised, but of course these self-serving laws do no make clear where the burden of proving that reasonable excuse lies. Previous case law would suggest the burden is actually on the defendant (for the civil standard) – Trustees (and sponsors, and advisers, anyone in fact) can but hope that the Courts would expect to reverse the burden (onto the Regulator) given the severity of up to 7 years in the clink is at stake!
Fair minded people would, I say, expect such powerful custodial laws to have clear parameters aimed at malfeasance or fraud, but no, despite being lobbied for this at the time TPR/DFT declined to provide such protective guidance. They were really serious in 2021 with their messaging on the need to “de-risk”, aided by the wafting of this terrifying sword of damocles. And yet we wonder why very few former (informed) actuaries or lawyers chose to become Trustees! Similarly, a greater understanding can be afforded about the propensity for cautious group-think and indeed the reckless prudence that became deeply embedded in the legal and actuarial advisory community and the resulting funding plans of Schemes (all as fully intended). Well job done.
Time (and future Courts and Governments, electorates) will tell whether such reckless prudence can become judged to fall within the ambit of egregious acts or courses of conduct…?
But for the current date, 4 years on from s58B, and a DB ecosystem that has lost £700bn in the value of its asset base, and is almost devoid of growth both in intention and action (ie only c£160bn of the rump of the now £1.1trn of Scheme assets are directed towards growth), the containment effect on the wider economy is all too evident.
So, yes, time for growth in mindset and action – it really is the only solution, but we need to fix the rules first !
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