Yesterday I sat through a day in the City listening to insurers talking about the safety of giving them your money while everyone else wanted to talk about what to do with the surplus funds not needed to pay the promised pensions.
Meanwhile, over the other side of the City of London, Jonathan Guthrie was getting ready this epic read which reminds us, what this blog has said for several years, that pensions schemes owe their members the best possible pensions!
Here are some excerpts, if you are an early bird you can get this read for free, if not – you can contact henry@pensionsmutual.co.uk and I’ll send you his golden words! Here’s the free link .
We may be in what the pensions industry calls the “end game” but defined benefit schemes are still very real for most of the people in this country lucky enough to have been in one (or more) as a result of the work they carried out.
The schemes already provide a fixed pension for life to white collar toilers past and present, not just foundry and factory workers.
The income is guaranteed by a current or former employer. The promise is backed by investment funds. These have accumulated surpluses in excess of their liabilities totalling some £160bn according to one government estimate.
Reforms expected to become law in April would let funds release some of this cash. The second chart shows the value per member of surpluses at different levels of scheme funding. The numbers are eye-popping by the modest standards of average pensioner incomes.
For example, schemes with assets amounting to more than 140 per cent of liabilities are sitting on excess funds averaging £50,000 per member. The figure is £10,534 per member for the largest group, which is served by schemes with surpluses of 105-110 per cent.
A big caveat applies. The money does not technically belong to members. Nor can sponsoring employers automatically grab it all. Pension schemes are run by trustees on behalf of members. Trustees may be members themselves, company executives or independent professionals.
Sponsoring employers are likely to see surpluses as “overpaid contributions,” says Lynda Whitney, a senior partner at consultancy Aon. To members, the money may look more like
“deferred benefits” but m in practice, the use of surpluses will involve a negotiation between trustees and the company.
” My hunch is that the starting point for many of these haggles will be a 50/50 split”.
You can see how well the Stagecoach trustees did for their bus-driving members when you discover the members are getting 2/3 of the Stagecoach pension fund’s surplus.
Guthrie is quite brilliant at reminding us of how members have benefited from surpluses in good time.
In the past, pension funds sometimes reduced surpluses by increasing members’ monthly payouts. Younger members will like the sound of that. Older ones will object that their lower expected longevity reduces the value of such increments.
This reminds me of arguments over the SPA and pension increases. There are various vested interests at work – something that Steve Webb always picks up on.
This is one reason why surplus distributions will most likely be via lump sums, according to Sir Steve Webb, partner at Lane Clark & Peacock, another consultancy.
Moreover, “companies will prefer a method that does not create more long-term liabilities”. Much of the well-intentioned paternalism that inspired defined benefit pensions lingers in the way they are run.
But as BP’s pensions (and other well organised pensioner memberships) know only too well.
Ordinary members are not expected to play a role in surplus negotiations.
There is a long section at the end of Jonathan’s article that looks at the legal ins and outs of sharing surpluses. We had a lot of that yesterday at Professional Pension’s excellent end game conference. I won’t rehearse but cut to the chase. This is all very well for the “haves” but what of the “have nots”?
Members of low-cost defined contribution pension schemes — which now dominate private sector workplaces — should meanwhile wonder why they are being left out. They could legitimately ask for employers to funnel a portion of surplus repayments into their pension pots. No rule forbids such top-ups, according to Tiffany Tsang, head of defined benefits at Pensions UK, an industry body.
If you don’t ask, you won’t get.
If Jonathan included “collective defined contribution” in his comment on workplace pensions, I’d totally agree. We are in an era of negotiation, unions are waking up and so are many members who have pots big enough for it to matter. I mean by that every body!
Interesting to look at your related articles and timing, Henry.
Pension schemes hold record surplus = May 18, 2018
First Actuarial – “scaremongering on solvency is driving people to cash-out their DB pensions.” = July 28, 2017
The first was apparently, but not in reality, wiped out by negative real gilt yields from mid 2015 to mid 2022.
The second with legislation and regulation turning scaremongering into reality required pension schemes to target a commercial profit generating product. The result being that probably a £Trillion (or possibly more) of pension scheme assets or potential assets have been withdrawn from pots used to pay pensions and thereby supporting the employer into dividends and share buy-backs benefiting the, to a significant extent overseas, owners of insurance companies.
“Gold standard”, “end game”, “risk transfer” – they’re all just sales pitch language from the insurers to the lazy and the gullible, and that includes DWP.
It’s also beyond parody that Mr Bell – the Treasury Minister, with a singular short term priority to ensure continued gilt issuance, is also responsible for pension regulation requiring schemes to support gilt issuance. Anyone who doesn’t realise this soft ( well hard, but obscured) confiscation via gilt mandation and effective nationalisation of DB pensions, is hiding their heads in the sand. Don’t be surprised if we suffer the same consequences the ostrich with its head in the sand.
The clever Minister understands this, but by declaring debate on such as ‘boring’ is hoping the lazy and the gullible carry the vote.
AI tells me that if an ostrich actually buried its head in the sand, it would asphyxiate.
The misconception is said to have originated in ancient Roman times, Pliny the Elder and others, from observing real, but misunderstood, behaviours (si cervicem aut caput frutice occultaverint, sedentes putant totum corpus non videri).
Ostriches do dig shallow holes for nests and use their beaks to turn their eggs several times a day.
From a distance, this may make it look like their heads are buried in the sand.
When threatened and unable to run, an ostrich may lay its head and long neck flat against the ground to blend into the landscape, appearing from a distance to be hiding its head.
They may also appear to have their heads in the ground while foraging for food.
In reality, an ostrich’s primary defence is to run at high speeds (up to 70 km/h) or to kick out at predators with their powerful legs.