DB Pension Schemes Can Address Inter-Generational Unfairness

A C-Suite Opportunity to Back Pension Provision for Today’s Employees

Many pension schemes show an accounting surplus (IAS 19).  Yet they are still paying cash to fund actuarial deficits and, with the new Funding Code, cash will be required to fund to self-sufficiency.  Do you have a choice?  Yes.  Use the company balance sheet.  Put in place insurance around the covenant.  A sustainable, long-term asset return can be used.  Then in time a surplus arises.  Use it to fund DC contributions for today’s employees.  All stakeholders benefit.

• Respond positively to the Pension Schemes Act 2020 and the new Funding Code: Provide third-party guarantees which ensure funding will always meet The Pensions Regulator’s requirements.  But make your plan bespoke.  Avoid fast-tracking to life insurers.
• Derisk to a sustainable, minimal risk position.  Take time – let a surplus emerge and use it to add to the level of pension provision available to scheme members and current employees.  Create or reopen a DC tier within the scheme.  Ensure, if necessary, there are changed rules so surpluses can fund contributions.
• CEOs and wider Boardroom and HR team’s interest should rekindle in the pension scheme as a positive value enhancing opportunity – not just a “no glory” problem for the finance team.

Reflect on the actual cash flow dynamics of the scheme.  To have a surplus in many pension schemes, all that is needed is to stick with a low risk investment strategy and wait.  Over time the scheme runs-off so the prudence in the actuarial demographical assumptions frees up (fewer were married; life expectancy improvements were not quite so big).  Prudence may add over 10% to actuarial liabilities.  Actuaries should explain under professional rules TAS 300 how much is involved – but rarely do so.
Investment outperformance: It’s hard not to return gilts plus 1.75% with a fixed income portfolio matching well set cashflows.  The leading fixed income investment managers expect to deliver it.

The C-Suite can add that message to its S172 Statement in the Report and Accounts that inter-generational unfairness is on the agenda.