What follows is an excellent rebuff by Pensions Oldie to the PPF lining itself up to take over small DB schemes. He has a more ambitious view and I suspect speaks from a position of authority.
From the scheme sponsor’s point of view there is little difference between consolidation and buy-out. The cost of each is entirely determined by the timing of the transfer of liabilities.
If a pension scheme is in deficit at the time of consolidation, the PPF consolidation proposals would create an actual liability on the Company replacing the contingent liability currently reported on the Balance Sheet.
The fact that the Balance Sheet figure is entirely contingent on changed assumptions is not lost on Companies – particularly those who previously reported pension scheme deficits and are now reporting surpluses, but equally those who are frustrated by the deficit fluctuating wildly when there has been no fundamental changes to the predicted cash liabilities of the pension scheme and the income generation capacity of the scheme’s investments has not changed.
From the employer’s point of view the capacity of the scheme to invest productively under its guarantee is paramount to the ultimate cost to the employer. Much of the problems that now arise particularly with small DB schemes (which should by now be larger DB schemes) is that the legislation, particularly that creating the PPF and the TPR, diverted trustees away from productive investment into a so called “low risk” investment strategy.
The fallacy that strategy is lower risk was exploded by the LDI crisis.
It appears that the TPR is now suggesting that trustees following their previous advice have let their pension schemes and employers down by not investing in “growth” assets. It was the salesmen for the insurance industry and the PPF (itself a compulsory insurance product) represented by the TPR (at least under previous management) who over-emphasised “risk” measured purely against the insurance company pricing model.
As a result employer/sponsors have had to pay twice: Once in terms of PPF premiums on an inflated risk measure and secondly to compensate for the lower returns from the “low risk” investment approach (still perpetuated in the DB Funding Code).
Macro-economic “growth” is more likely to be achieved by encouraging the 4,000 odd existing DB schemes to grow, both by investing for growth and also by directing new contributions into the DB scheme pool rather than the DC pots of individual members (dead money to the Company).
In that way the future employment cost of the sponsoring company is reduced by the extra return from pension scheme assets prudently invested for long term growth. By reducing the future pension cost the sponsoring employer itself is more likely to be able to grow and this is likely to create more economic growth than an arbitrary percentage of existing and ever decreasing pool of pension scheme assets in which the employers have no interest.
Never forget the pension scheme members including ASW , Dexion , Bradstock etc who had to fight for FAS over 20 years ago and who are now surviving on non indexed pensions even though they paid for the expectation of indexation
… and why were the PPF and FAS benefits restricted in this way?
It was because the insurance industry persuaded the Government of the day that their pricing model including premiums for investment risks and profit generation used for a single premium calculation should be used to evaluate the future cost of providing all pension benefits. This greatly over stated the potential cost of meeting the employer guaranteed benefits.
This has resulted in the current surplus being reported by the PPF and in the case of FAS members the over-estimation of the cost to the Exchequer.
We do urgently need a full review of the cost of the 2004 Pensions Act to the UK economy considering:
1. The loss of past, present and future pension income of not only PPF and FAS beneficiaries; but
2. the much larger group of employees whose employers were encouraged to restrict their costs by switching from DB to the poorer value for money DC pensions; as well as
3. the employers pushed into insolvency by excessive deficit recovery demands and PPF levies based not only on over-estimated liability values but also a risk classification which over-biased employer solvency risks on size criteria.