Schemes should not be panicked, where they can- they should run on.

The disgraceful lobbying of insurers PIC and Just to keep the current threshold for partial withdrawals by employers continues. They continue to send out press releases under the Pension Security Alliance to distress those running DB pension schemes into offloading pensions to annuities- usually with no advantage but to the insurers.

Now it has captured IPE who have printed nonsense from false information fed them by PSA. You can read the drivel by pressing the link above but you can get the import from the headline. Schemes should be allowed to run on

The Pension Security Alliance is two insurance companies backed by one consultant- John Ralfe. The concern that PIC and Just have is that the prospect bank of pension schemes they can buy-out will contract if the Government changes the level of funding needed to allow withdrawals by employers.

These withdrawals will help companies invest for the future  and ease the intergenerational unfairness of workplace pensions – by paying more to younger staff rather than hoarding for those in a DB plan.

I have written about the DWP’s Impact Assessment and published it for readers to check it out. I am not finding in its 400 pages a fear of drawdown from the surplus by increasing its definition from buy-out to low dependency. Here are the numbers in the IA

Here is what the IA estimates will get withdrawn. Their key number is £8.4bn and that’s based on the phoney estimates of surplus provided by TPR, if we go by the ONS numbers, the amounts expected to be provided as benefits to employers would be less.

As will be confirmed by two commentators to this blog, the issue that the country has is not with “raiding” surplus on one spurious measure or another, but on the failure of the DB pension system (in the private pension system) to survive the ravages of 20 years of “low dependency”. The IA shows there is no bonanza for employers, only 5% of a potential £160bn would be withdrawn- were we to move from buy-out to low-dependency.

Thoughts of those who do Maths

The following comment on these numbers and the “folly of low dependency funding” has reached me from a source that I trust.

The DWP figure of £160 surplus for schemes in surplus is based on a TPR estimate (£162 billion) as at September 2024. This is based on an unreasonably low estimate of liabilities at time – that liability estimate was carried forward from their lowering of scheme liabilities by £140 billion when perhaps £48 – £50 billion was warranted. Our estimate of the surplus of schemes in surplus on this low-dependency basis was £71 billion at that date.

The idea that buy-out remains the route of choice for schemes is questionable. If we choose to run on and are 130% funded, then we can pursue high growth investment strategies. A simple numerical example will illustrate. Let us suppose that hedging assets have 10% volatility and growth assets 20%. Now the standard consultant advice is to invest to hedge the liabilities and use the excess to invest in growth. That would be £100 at 10% and £30 at 20%, assuming perfect correlation between them. If the one standard deviation risk occurs the scheme is still 114% funded.

But if we invest the entire fund in growth assets, and this one standard deviation loss occurs, the scheme still has sufficient (£104 billion) funds to pay the pension liabilities in full.

making that simple illustration more realistic by having liabilities decline in some relation to the hedge asset fall and a less than perfect correlation between growth and hedging would improve the relative funding level.

I will add one further comment – overall scheme assets are assumed to be £1.2 trillion, which the PPF now makes less than £1.1 trillion – our most recent modelling has the overall assets as slightly less than £1 trillion.

Such growth investment strategies highlight the folly of TPR’s low-dependency asset allocation ‘guidance’.

The DB system – all £1tr (not £1.2tr) needs to work harder for the country, for its members and for those who are not in DB who need better financing of their later lives.

A second witness to call to the debate

The iniquity of the Pension Security Alliance’s attempt to scare us into transferring DB schemes into insurance arrangements is exposed for what it is by Pension Oldie who we know to be a Trustee of a DB pension scheme that has set itself against closing.

The new powers in the Bill are purely to give Trustees power to change the Scheme rules to allow them to refund surplus to employers if they believe to do so is in the interest of the members of the Scheme (NB: in most cases not the current employees of the Company) if they do not already have that power.

The 2024 consultation stated that “Respondents to the call for evidence suggested that the major barrier to surplus extraction is that many scheme rules prohibit trustees from extracting surplus.” Subsequent discussions with many trustees indicated that the majority already have the power to distribute surplus to the employer, although this may subject to restrictions in the Deed.

Certainly in 2016, pension schemes legal advisors were not slow in coming forward in publicising the need to pass a resolution to confirm the power, so the power was not accidentally lost by active trustee boards. It is therefore likely the respondents to the consultation were those with a vested interest and this has biased the significance.

In practice the most likely target is the smaller schemes long established in a different era and closed many years ago who are quite happily running out with minimal administration (and cost) where the surplus would become available anyway “when the last member has left the scheme”.

Given many trustees already have the power, few have used it. The Options for DB Schemes stated “HMRC analysis suggests around £180 million in surplus has been extracted over the 5 year period between March 2018 to March 2023.” This includes and may mainly consist of surplus distributions after buy-out.

While this small figure is likely to be due to the excessive Technical Provision and Solvency liability measures applied and high insurance company risk transfer pricing during this period, it is hardly an indication of a large pent-up demand.

Thirdly, the headline £160BN figure has been widely ridiculed in trustee circles, and indeed the Impact Assessment’s figure of £8.4BN over 10 years (half of which it suggests should go to members) was anticipated in discussion forums I attended.

My conclusion therefore is that this is very much a “red herring” proposal designed to assuage a vocal interest group and it will have very little impact on employers and the UK economy’s growth prospects.

The real question is how should the £1.2TN assets in private sector DB pension schemes best be used to not only guarantee the retirement incomes of the existing members, but also to enhance the future growth prospects of the employers and the current and future workforce.

While there are short term cash flow (and possibly enhanced accounting asset recognition) benefits from employer’s moving the surplus into the DC pots (whether within the same scheme or elsewhere) of current employees, the assets transferred are lost to the employer for its future growth prospects. The obvious answer is already in the employer’s capacity, that is to re-open a new section within the existing DB scheme, providing a level of guaranteed benefit that it is confident of being able to fund over the long term.

The current and future employees are then reassured on the expected retirement income guaranteed by the existing scheme asset base, further employer and employee contributions, and their investment prospects, as well as an underlying PPF protection; all of which are not guaranteed in a DC arrangement.

The IPE magazine has printed what it has been given by the PSA. There is no press association for schemes wanting to run on and if possible return money to employers that they had to demand during the years of austerity.

I am writing on behalf of those I know through this blog and through my work in the pensions market. I hope that other trade magazines will stop and consider the damage being done to pensions by insurers behaving in this way. I hope that the trade press will stop printing the panic inducing nonsense of the Pension Security Alliance which is no more than a lobby for greedy insurers.