HT looking a lot better in this picture
Richard Jones’ excellent explanation of the history of pension surplus kicked off a first rate discussion. Have a look at the slides to get an idea of whether you want to devote up to an hour of the session.
Richard Jones is an old friend to many of us but if you don’t know him, you’ll feel like one of his cronies!
Here is the video
A large part of the conversation is about the impact of the Stagecoach/Aberdeen deal and what it may do to a market which has until recently been most dominated by insurance companies.
Read some fine comments from Derek Scott, who was for many years COT of Stagecoach and Peter Cameron-Brown who is to this day a COT of UKAS. They started their careers in these jobs back in the 1980s and offer a commentary on the DB world we had in the last century.
William McGrath and Richard may moan about the absence of data from those days , rightly so. There is much to say for transparency and there is much to come out on the rules of distribution of surplus from the Stagecoach Scheme.
We hope you enjoy it the debate, it is an historic document of the progress we are making. Yes videos as well as slide decks can be deemed documents!
I am sorry I made no contribution, other than to announce this “document” at the end. I spent a little time with my neurologist who was evaluating my little grey matter.
We agreed at the end of my consultation to listen to the discussion. He said that he understood about as much about pensions as I did about brain surgery. We agreed on that!
I fear Peter Cameron-Brown and I were in our element this morning, when more enjoyable trusteeship between 1987 and 2005 was being précised by Richard.
Bryn admitted that he was there too, in his Bacon & Woodrow days.
Bryn was the only one who remarked about what I posted in the chat about the discount rates and mortality assumptions actuaries had to use to calculate whether or not there was 105% surplus.
The Pension Scheme Surpluses (Valuation) Regulations 1987 had hard-wired discount rate assumptions: 8.5% for pre-retirement liabilities and at least 3% for post-retirement liabilities.
The mortality assumptions were, with hindsight, very weak – based on 1960-1970 experience – in tables called PA(90).
No doubt many of today’s actuaries would argue the discount rates should be “risk adjusted”.
MFR from 1997 was then expected to put a floor under these, by today’s standards, very high discount rates.
Hence discount rates quickly became gilts plus, with the plusses getting smaller over time.
I would argue having such higher discount rates as 8.5% for pre-retirement liabilities encouraged trustees at that time to set higher targets through investing more in growth assets and income streams than they do today.
In summary, if you seek only gilts plus returns the bar is generally set low (except when gilt yields were double digit in some of the 1970s and 1980s, before my time as a trustee, but nevertheless an important lesson from history).
Thank you for the interesting and informative presentation.
Con’s comment about using surplus funds to acquire companies prompted me to consider an alternative investment strategy.
In the specific example: Stagecoach, which was sold for £600 million, had previously contributed £2.6 billion to the pension fund over its lifetime. This raises an interesting question: what if the pension fund had considered acquiring the company itself?
Based on publicly available financial information, Stagecoach was generating post-tax profits of approximately £62-76 million annually at the time of sale. Had the pension fund purchased the company for £600 million and distributed all profits as dividends, this would have yielded a return exceeding 12% per annum.
This prompts several questions:
1. Could direct ownership of profitable operating companies represent a viable alternative investment strategy for pension funds?
2. What would be the implications—both benefits and risks—of the fund owning such assets directly rather than holding equity stakes through traditional investments?
3. Given Stagecoach’s proven track record of contributing to the fund, would direct ownership have provided better long-term value?
I’d like your thoughts on whether this type of strategic acquisition could be part of the fund’s future investment approach.
Why go through an investment house when there are enough resources available with capital, unions, management and trustees continuing to run a successful enterprise and just changing the roles of each team member?
I’m not sure about the £2.6bn you say had been paid into the pension scheme over its lifetime.
The contributions between 1987 and 2017 when the scheme closed to future accrual maybe ran into a few hundreds of millions, but the value of the assets now transferring to Standard Life seems to be £1.25bn.
Marks & Spencer did something along these lines a few years ago by having the pension scheme take an interest in retail properties via a Scots Law partnership. And my recollection was this was 15% of the assets but didn’t count as “self-investment”.
There is of course a self-investment rule where the bar is set at no more than 5% of scheme assets. (Some have argued the bar could/should be raised to 10%.)
But 5-10% of scheme assets would not be enough to buy a company for £600m in this example, John.
Oops, Aberdeen, not Standard Life, which is now part of Phoenix Group.
Thank you for the correction I misunderstood the size of the surplus.
Raising the 5% seems like a no brainer to get investment into British companies ( as long as it is not used to fund buy in of options or fund dividends to Monaco.
I think the main lesson from Richard’s and Mathew’s excellent analysis and talk was given the almost complete freedoms that existed in the 1980s and 1990s, how little of the then estimated surpluses companies took by way of (the then tax free) refund. It appears they preferred to use the surplus to aid the business in other ways, firstly by reducing company contributions with contribution holidays, reducing employee pension contributions to permit smaller pay rises, and using enhanced early retirement pensions to aid corporate restructuring. Is there any reason to believe companies with pension scheme surpluses will now suddenly become much more enthusiastic about receiving a refund subject to tax over other opportunities to use the pension scheme surplus?
The position has however fundamentally changed in that these examples were only possible with a defined pension benefit, whereas nowadays most companies are tied to the tyranny of DC contributions, which can only be revised by legislation or a complete renegotiation of employee service contracts and thus likely to be changed upwards only or triggering salary compensation.
As an alternative to sharing the surplus with a previous generation of employees (and not necessarily those of the same company as it now is – ala Stagecoach) I do wonder whether companies will not wish to keep the pensions scheme assets on their Balance Sheet and also wish to seek to grow that asset by investment returns in excess of the valuation assumptions.
Of course they could reopen DB accrual and use the surplus for the purpose it was originally intended!