Meg Baynes’ piece in the Times which I featured on this blog is beginning to get some traction around the world
Astounding. I think because investment literacy is so low in the UK and saving-via-homebuying is so embedded, people don’t realize how much money has been effectively lost here – how many shorter, less comfortable retirements it means. Should be a scandal. https://t.co/gRY7Ja6GcB
— Mike Bird (@Birdyword) January 5, 2026
The simple facts astound this editor of the Economist in New York’s Wall Street.
Let’s remind ourselves of the article in the Times from Meg that got this started
There are people laughing at the simplicity of Meg Baynes as if she were a simpleton. Read my blog- she is no simpleton.Mike is no simpleton, Josh is no simpleton
Meg is pointing out what her generation ought to be astounded at, what Mike Bird is astounded and what the British pensions industry thinks is ok.
Because BA and BT and UISS and Shell (and to a degree Railways) are so de-risked that they cannot take advantage of the returns that everybody else have been enjoying in the past few years.
The truth is that being de-risked meant that money flew out the door in 2022, mostly in October 2022 when the LDI de-risking led to more than half a trillion being paid to banks for the borrowing of gilts. Since than DB plans have been in “surplus”, not because they have done anything right but because they have found what they should always have known if they’d looked at the #FABI index, that they were de-risking a deficit that didn’t exist
This graph was from the start of 2022 , it had looked pretty much the same since 2016 when First Actuarial started it , taken on a common-sensical basis, UK DB pensions weren’t under funded, they were in a position to meet their obligations (pay their pensions).
But having lost over half a trillion in the Budget triggered disaster of October 2022, the DB plans have gone into lockdown, investing very little into growth stocks and preparing for the end-game – a buy-out by US private market owned insurers and UK insurers dong their best to compete by working eye-watering bond strategies .
Instead of investing for the future, the large and small UK DB pension schemes have battened down the hatches and sat below deck.
There are of course DB schemes that want to get back on deck and set the sails right. Stagecoach have done it and there are schemes like UKAS and ABFoods who never de-risked , stayed on the deck and are now wondering how to spend surpluses,
It need not happen that DB pension schemes suffer the penury brought upon these mighty pensions quoted by Megan. They are in that position because of the wrong ideology introduced in the first decade of the century and overseen by TPR. First Actuarial’s #FABI issue turned out to be right, there was no need for LDI and LDI has led to the awful returns ever since the 2022 budgets for those who have stayed in low-risk investment strategies.
This of course need not be the way to run pension schemes. We do not need to throw pensions out the pram, we can still pay them, we can do so and invest in growth assets which will do a lot better over time than the strategies of the DB plans quoted. The way to do it is today called CDC though it looks very much like the DB we ran in the last century – by and large very well.
We do not have to have a DB pension system that is an embarrassment to us, which is laughed at on Wall Street and wept at by people in the UK who care for pensions.
DB ripped money out of the bank accounts of large employers when there was no need, when the real investment return needed to “breakeven” was what large DB pension schemes are achieving. Pensions should never have been declared in deficit, they weren’t and there were people from First Actuarial pointing this out.
Now these companies who dived into LDI are gloating they are in surplus while having lost a lot of money since 2020. It takes youngsters from the City and from Wall Street to point out what lunacy our DB investment strategy was and is.
Thanks Meg for pointing out the obvious with the fresh eyes of youth
Henry, you say “There are of course DB schemes that want to get back on deck and set the sails right. Stagecoach have done it and there are schemes like UKAS and AB Foods who never de-risked, stayed on the deck and are now wondering how to spend surpluses.”
I’d suggest there’s more than one way to skin a cat here.
Based on publicly available accounts, let’s start with Stagecoach’s scheme asset value which declined from £1.495bn in 2022 (before the LDI crash) to around £1.25bn based on the recent Aberdeen announcement. The proportions of bonds in the asset allocation seem to have increased from around 20% to around 80% in that period.
UKAS seems to follow a more traditional 70:30 growth/income split in its asset allocation throughout.
As for AB Foods, quoting from their accounts around the period of the LDI crisis:
“The Scheme’s assets are managed using a risk-controlled investment strategy, which includes a liability-driven investment policy
that seeks to match, where appropriate, the profile of the liabilities. This includes the use of derivative instruments to hedge inflation, interest and foreign exchange risks.
“The Scheme utilises both market and solvency triggers to develop the level of hedges in place. To date, the Scheme is fully hedged for 75% of inflation sensitivity and 76% of interest rate risk. It is intended to hedge 80% of total exposure …”
The 2021/22 return on scheme assets nevertheless showed a loss of £582m and for 2022/23 a loss of £238m.
As John Ralfe might say, it was leveraged LDI which did for many UK DB schemes during 2022/23.
AB Foods’ hedging ratios seem more sensible, and their heavier bond allocation seems consistent with the proportions of scheme membership, active members around 20% while deferred members and pensioners represent around 80%.
I would suggest the massive swing in your threesome’s combined accounting from pension deficits to large surpluses is more down to a measurement methodology based on AA corporate bond discount rates than anything else.
DB derisking is not the work of deranged Trustees ignoring the obvious advantages of higher return investments. It is the entirely rational approach when the covenant cannot be relied on for more than a few years, the accounting rules insist on using bond linked rates and the sponsor has been hit hard by deficit payments once, and the only true end game is buy-out.
Yes, technically best estimate rates could have been used for technical provisions, but not for the accounting, and certainly not by an external observer, a predatory company perhaps. Further, using best estimate rather than bond rates for TPs would also attract the unwanted attention of TPR, and stories of TPRs heavy handed approach to the review of optimistic valuations are backed by my limited experience.
Trustees are not idiotic, the accounting liability recognition and valuation rules, the legislation on deficit recovery, and TPRs mandate and approach may be.
The PPF was set up to reduce the risk to member benefits of employer failure.
Its existence should surely have given pension schemes increased confidence to invest for secure long term returns – not to target an end game asset value that did not reflect realistic investment performance but which generated eye watering profits for insurers and for declared and non-declared insurance brokers (sorry pension consultants)!
I agree that it is the fallacy that pension scheme liabilities can be evaluated using a current spot bond or gilt yield that is the fundamental issue and which has cost this country dear.
The fundamental issue is that a DB pension scheme is a mutual enterprise – mutual between the employer and its employees. Investment returns secure first the outcome for the members (past and present employees) and good investment performance rewards the employee who can then utilise that performance to extend the benefits to new employees. As soon as you remove the incentive to reduce the employer’s future employment costs (e.g. by closing the pensions scheme to new entrants), the incentive to invest sensibly for long term (and certainly more than 5 years) investment returns is lost.
Because that incentive is lost to the employer, the true cost of the high cost insurance option is obscured and an entirely short term view prevails. We appear to have forgotten the outcome of any investment or pension arrangement is almost entirely derived from the return achieved between the time of investment (pension contributions paid) and the time the investment is realised (in the annual pension or permitted lump sum payment). Just because insurance companies commercially price their products based on current spot rate investment returns does not mean you should not target these as the the long term investment return of the pension arrangement. Insurance companies may be bound by Solvency Regulations but that does not mean pension arrangements need to reflect them and to do so is entirely dysfunctional.
This in my view is the fallacy of the entirely misnamed “risk transfer” approach and the ridiculously swallowed “liability driven investment” approach that targeted entirely fictitious liabilities. the cost to employing companies and the UK economy generally has been put (by others) into the Trillions of Pounds – I believe this may well be a considerable understatement as we do not appear to be learning the lessons and are only now beginning to understand the true high cost of a DC pension arrangement.
Sorry a couple of typos:
… good investment performance rewards the EMPLOYER who can …
Just because insurance companies commercially price their products based on current spot rate investment returns does not mean you should — target these as the the long term investment return of the pension arrangement.