I am very proud to call Peter Cameron Brown a friend and proud to give free airing to his amazing work, knowledge and his capacity to get it across! Here he is
You can follow his slides from yesterday’s presentation here
You can click on to the slides here if you don’t want to download.
The presentation starts with an introduction to Derek Benstead who was present at the call and remains my (and I think many of our) authority on the actuarial aspects of Shared Ambition Pension Schemes.
It gives the audience an economic history of the progress (or lack of progress) of final salary schemes from the 20th to the 21st century and to now (back to where we were prior to the financial crisis of 2008). The cycles of assessment are in Cameron Brown’s assessment 70 years long leading to him to think three cycles ahead as into the 23rd century. His criticism of the actuarial profession is that they mark to the market’s value of assets and a current gilt referenced valuation of liabilities.
Employers enter into a treaty at outset , when commencing a contract with staff on a DB basis, the employer is tied to the terms of the trust of the scheme and cannot be changed by the employer (without consent). The deferred remuneration promise is linked to the current pay or if the employer has left – statutory revaluation of the last payment.
This is the background to “shared ambition pension schemes”. Historic rights cannot be impacted if a scheme moves to this basis. I am glad that this is made clear at outset.
Taxation basis of pensions (accounting basis)
Payments made to defray the employer’s costs to a pension, from wherever (including payments from the DB scheme are considered taxable from accountancy purposes.The clarity of Peter’s thinking on DB pensions (minute 20) draws on his expertise as a lecturer in accounting which he achieved when he was 21 – immediately after graduating in accounting.
Shared Ambition Pension Schemes
Here is the thick of the presentation
Peter quotes Alan Pickering saying (as a Trustee)
“the more you request me to guarantee, the less I will guarantee”
He points to the flexibility to an employer and trustee in funding for future benefits. The employer’s payments are linked to the investment achieved. Deficits can be limited by reducing discretionary commitments to pay pensions. The key achievement of Cameron Brown and Benstead in 2003 was to change the expectation of what will be delivered will be more like “with profits” by balancing benefits paid with benefits earned by the fund and willingness of the employer to pay more.
I include a first actuarial version of the life cycle slide on which this blog is based. It is properly accrediting it to Derek Benstead by Peter, this is the heart of thinking. Cameron is challenged to confirm that benefits once granted cannot be taken away (by Barry Mack). This is confirmed not to be the case, this is one of the reasons why this differs from CDC. The guarantee of 1/120th of average salary is not a great benefit unless it is the base for members. Members should expect trustees to be striving for a surplus that pays more. This is why Peter Cameron-Brown thinks of what happening as “with profits”. The with-profits element is both financial and emotional (a word that you don’t often here from accountants).
Discount rates for asset and liability valuations
Do look at minute 42 for Chris Giles challenge to pension schemes to move from a gilt based to an asset based valuation basis. Peter’s response is that the scheme will be managed by its expectation of asset returns as the discount rate which may differ from what the Pension Regulator values by. This is a view that has been expressed by many (several in the audience including Con Keating).
For 10 years (2009 to 2019), the trustees showed no revaluation of liabilities to allow the scheme to return to full funding against a reduced promise. In practice a contribution from the company was paid in 2019 but it turns out to have been unnecessary.
“Looking at it now the need for employer contributions is reduced and it has been reduced by 5% to allow the employer to meet its technical provision obligations”
Peter calls his scheme “in a very strong position” by not relying on technical provisions as the sole guideline for funding. Taking a long-term position that looks at 70 year cycles is rather better for employer , trustees and members. The trustees gave members little expectation of increases in future years , moving onto a basis of profit share.
Anyone who has been following this blog about the noises coming out of Nest and others, will recognise there is a move towards this approach from the strong boards of a scheme’s executive and trustees. Let us hope that the scheme’s executive at Nest (strongly influenced by Government) will become an example for others. Let us hope that Peter’s example will strengthen their endeavour for Nest and other large DC plans will incorporate elements of this to the payment of pensions for their 13m members.
A little addition from Peter and Derek Benstead
The presentation ends with a moan about the “costly” requirement to satisfy Auto-Enrolment and DB funding requirements from the regulator. The need to do this looks limited and could be dispensed with where the intention of the trustees and employers is so clear.
Peter hands over to Derek Benstead at 1 hour 1 minute to Derek Benstead. Derek points to the capacity of schemes to link their valuations to the expected returns expected by the scheme investment team as the area for progress for pension schemes in general.
Sharing the whole surplus with members at the point of valuation is not on either’s agenda. The money may not arrive at once but is always still there and there to come for those in future years. Derek says the big reward for members is that the scheme has remained open that is responsible to pay what it can over time.
