Prime Minister and Chancellor right to challenge pension investment strategies

Pension funding of old Defined Benefit (DB) schemes takes up too much cash for many of today’s businesses and the UK economy.  Yet regulatory work and the inspired decision to set up the Pension Protection Fund means we can stop over-solving pension problems. 

​The Prime Minister’s and the Chancellor’s recent call to investment managers to put more money to work in the UK in infrastructure and technology is right.  What is needed is to take time.  Run the scheme on and cash flow projections will show most major schemes are OK or better than that.  Plan for success while addressing the risk of failure – through risk diversification. 

I have had a career in the City and then in traditional businesses with large pension schemes like Aga Rangemaster.  Now having spent some years working in the arcane world of pensions are my recommendations for corporates and scheme trustees are: 

• Corporations should get a grip on pensions.  If not you will be news managed to your cost, effectively and pleasantly by the actuary and ever helpful consultants.  In particular, have all the facts you can gather in scheme specific demography and health profiles. 
• You need your own scheme model so you can factor in actuarial and investment assumptions and corporate financial capacity.  Think in actual cash more than actuarial £s. 
• Provide/ arrange a way to help the scheme cover its downside risk of sponsor failure through third party guarantees.  The financial capacity of the corporate can be linked to the financial strategy and requirements of the scheme as a package.   
• Agree a long term, low risk, investment strategy for the scheme with a manager operating under a long term contract.  They can access illiquid assets often in infrastructure with good yields.  They should be expected to know about the payments as well as the receipts side of the equation. 
• Think positively about the future.  Not implausible that a surplus arises, given the investment made to meet liabilities inflated by market circumstances.  Agree how best to use such surpluses to add to current pension provision as well as improve benefits.  No need to pay cash back directly to the sponsor. 

There will come a time for most schemes where the level of maturity, the running costs, the governance issues mean that a life insurer is the best answer.  Many companies are running the risk of packing schemes off to nursing homes far too soon.  Meanwhile it is a terrible waste not to see if the available resources can help the next generation of employees. 

Reactivation beats decommissioning - running on beats buyout.  It is an approach which can benefit all stakeholders.  Pensions is a subject on which most people go reluctantly to school.  A little swatting up, however, can bring remarkably good results.   

Invest the time and money so all harvest the benefits of the DB magic money tree.