DB pension peace of mind comes from inflation protection, not always from a sale to a life insurer.
The DB pensions industry has a largely settled opinion that “derisk and get rid” is the right journey plan for most pension schemes. Members are told that here is “peace of mind” and that buyouts are the Gold Standard. This approach benefits actuarial consultants and life insurers.
Scheme members, current employees and scheme sponsors should all look harder at the alternative option of scheme revival on a modernised basis so it can operate in all stakeholders’ interests and over the long term.
Members should be asking more challenging questions of their trustees. Inflationary times may lead them to have a new view of their best interests and the security of their pension seen in real value terms. There is a cap on payments – usually at 5% and inflation is 10%. It is what the pension buys not the nominal amount that counts – as the Goode committee pointed out in 1992.
The risk assessment for members needs to be rerun. The downside is modest and measurable. There is the fully tested safety net of the well-run, well-funded PPF. It covers a large, increasing proportion of a pension. How the untested, unfunded Financial Services Compensation Scheme works is currently the subject of a Government review. With a buyout access to discretionary benefit improvements goes. The link to their former employer ends and the investment policies pursued are out of members’ control- just as ESG considerations come to the fore.
Solvency II replacement is much debated and creates uncertainty around concentration and systemic risk. There are also profound questions over future pricing as Government initiatives take hold. They are designed to improve pricing and increase competition. Wait and see is the sensible response.
Meanwhile corporate and member agendas have to move on. Most sponsors have committed to high standards of ESG. Pensions is a test case of those policies when in action. Does the large investment portfolio align with their green agenda? Do they see the scheme’s role in looking after the interests of former and current employees as important as their ESG statements indicate. Sponsors should be encouraged to stay the course and be leaders.
C-Suite Pension Strategies shows how available products can be combined to produce better outcomes. But what is really needed is for members and sponsors to question the negative pension sector mindset.
Transparency is needed. The losses arising from derisking are hidden away in sponsors’ accounts where they do not impact earnings. This means Schemes misreading of financial markets and longevity trends does not see the cold light of day. Certainly, the case for spending large sums on “derisking” from the members’ perspective should be restated more urgently cogently. And shareholders should wince at how their money has been spent. Consultants should be expected to provide data on actual transactions.
Current markets provide a good test case. Interest rate rises should have reduced actuarial liabilities – more scope for improvements? But not so fast. Matching asset will have fallen heavily in value. The scheme may be forced to sell return seeking assets to meet cash collateral calls under LDI programmes. Ironic if risk reducing measures stand in the way of discretionary payments to members.
“Decommissioning” is very often not in the best interests of members and does not provide “peace of mind”. When the Boards of sponsors embrace the schemes and do not abdicate responsibilities, a new and better settlement can emerge. When there is time made available all stakeholders benefit.
No discretionary increases while inflation reduces the value of pensions? Members should consider their position and revolt. Current employees should ask for surpluses to be used to boost current provision.