I am writing on a subject that is not yet popular but will become increasingly more important as the spring and summer come on. Necessarily Britain has to return to pensions and that means reviewing what large DC pensions do to get them paying pensions. It also means getting us to understand how DB pensions can stay pensions (rather than annuities) and open both to future accrual and to the grant of pension from transfer in. Yesterday’s blog on the work being done by Peter Cameron-Brown shows how a scheme can be managed to stay open in such a way.

He calls it “shared ambition”, it is a world where pensions are estimated on a return that can be met over time and more pension is paid “with profit” from better returns.

Yesterday saw the publication by Hymans of a newsletter on how DB schemes can stay open. Unlike the shared ambition vision , the view expressed is that better times are here, this is a worrying view, better times based on something so notional as the long-term gilt rate worries me!

For a consultancy to open a newsletter for trustees and sponsors of open defined benefit schemes seems counter-intuitive. Weren’t they supposed to be a dying breed?

I read this first newsletter the day I re-watched Peter Cameron Brown. Peter explained that he discussed his DB scheme internally with reference to an internally agreed return on assets which was long-term (using 70 year cycles) and numbers worked out by key experts (one of whom was in the audience).

However, when discussing the scheme with the regulator another system for explaining funding had to be employed. This is known as gilts + a fixed number (typically very low digits). This system has encouraged DB trustees to de-risk using gilts so as to have minimal surprises (Oct 2022 being the exception).

This can allow Hymans’ actuary Jonathan Seed to explain

and the Newsletter to make it’s headline

This is the perverse impact of mark to market valuations based on gilt yields + a certain number. It translates into a chart that may make sense at an abstract level but does not make sense to an employer or a pensioner.

What this chart shows me is the total nonsense of DB pensions measured by this gilts + methodology. It allows us all to think of DB as very “cheap” to operate now rather than the years prior to the end of the post 2008 economic measures that created artificially low gilt rates.

Chart showing the happy position for DB pensions measured on a gilts + basis.

But you and I know that a pay cheque – especially a pension pay cheque – consists of real money and is every bit as expensive to pay today as it was in 2021, the only difference is one of accounting.

If we want to move towards a real world of pensions, both from DC and DB schemes, we need to adopt the method that Peter Cameron Brown adopts for his open DB scheme which I hope will bring in a new trend, DC schemes becoming DB.

This can only be done with scale and endeavour and by strong backing from sponsors to ensure there is backing to pay pensions. But the cost of paying pensions should be determined by real money into “gilts” and the capacity of a fund to meet its pension bills should be based on the real rate of return determined by the trustees, agreed by the employers and endorsed by a Government keen for pensions to be paid,

I do not see this happening yet and I see the “gilts + chimera” as a false dawn. What has happened in Peter Cameron-Brown’s scheme is an agreement that has proved lasting and while it may not be “gilt-edged” has been and is sustainable.

I hate to push back on Hymans, I have meetings with them over the next week and find them a most progressive consultancy, but we must return to the pension funding we enjoyed last century (based on estimated returns) and turn away from the mark to market valuations using gilts + methods.

If you haven’t listened to Peter, here he is. You will need 73 minutes to watch and listen to him present but this stuff is important and I hope that none of those like Jonathan who I admire, will feel insulted when I say that Peter’s capacity to see the wood for the trees has made his scheme a phenomenal success. Think Warren Buffet for comparison!