Pension Oldie’s testimony

Pension Oldie is a regular commentator on this blog and this comment was made after my blog yesterday which posed the question – what is the Government going to do with the PPF’s £16bn surplus. My speculation is that the PPF is a fully funded insurance fund – that is a fund that bails out an insurer who struggles to pay the annuities it has taken on.

The comment is at the end of this blog

Firstly, I should declare an interest: I “retired” from a final salary scheme with guaranteed full RPI linked pension increases and decades of service just before the end of the last century (although commencing my pension a couple of years later). The pension scheme was more than fully funded at that time. When the real gilt yield fell to around 2% a couple of years later, the pension scheme was closed to accrual.

Eight years later, when the deficit recovery contributions ceased to be based on a positive real gilt yield, the sponsoring employer took the view that it had no realistic prospect of meeting the contributions now being required of it plus the PPF levy and went into administration / liquidation with loss of jobs.

After a hiatus of a few years, partly created by GMP Equalisation issues, the PPF determined that the pension scheme, which had run on a closed basis, had been over-funded for PPF level benefits (at 10N%). A couple of years later by which time the real gilt yield had fallen to -2% the liabilities were bought out with an insurer at PPF plus N-y% (a negligible number) benefits.

I am therefore left with almost my entire pension (except for the GMP) no longer receiving inflation related increases, in line with the contract I had signed when I joined the pension scheme and committed to the Member contributions.

If the PPF assessment had provided for pre 1997 indexation, my pension scheme would have entered the PPF.

So lets consider what has happened to my contributions and the other assets to the pension scheme. The simple answer is that they have ended up with an insurer (possibly, although not in my case, now owned by overseas private equity) in a policy that was priced on a minus 2% gilt yield (or the swaps equivalent) basis at a time when the risk premium represented in the matching adjustment adopted by the insurer was around 5% p.a. higher and when expected mortality was vastly over valued.

If the scheme assets had been slightly less at the time the employer took the view that it could no longer meet the deficit recovery contributions plus the PPF levy, the Scheme would have entered the PPF. It therefore appears likely that the present PPF surplus also arises from the over-valuation of the liabilities of the schemes which entered the PPF and the over-statement of the risk based levies against the subsequent reality in both mortality and investment performance.

If the Government is now seeking to harbour the PPF assets against the risk of a possible loss of a significant bulk purchase annuity provider, it appears that the insurance company owners have effectively stolen resources from pension funds both those where the employers are no longer in existence and those continuing who have paid excessive PPF levies and also unnecessary deficit recovery contributions now apparently represented in pension scheme surpluses.

Just as the first call on the surpluses now in the pension schemes must surely be to uplift the pension rights of the members to match inflation, is it not reasonable to say that the first call on the surplus of the PFF should also be the indexation of benefits?

That would then leave different issues with the willingness of the Government to fund increases to Financial Assistance Scheme benefits, and also the equivalence of those members whose pension rights have been bought out with an insurer without inflation protection.

I recall there was a few years ago some suggestion of a windfall profits tax on insurers who have benefitted from the over-pricing of annuity contracts. Perhaps a requirement to at least “Minimum Rate” inflation protect all DB benefit buy-in and buy-out policies could address the inequality issues.

Is the Government apparently back-tracking on its promise to address the pre 1997 indexation issue because of pressure from the Insurance sector? I hope not!