Has filling black holes created magic money trees?
William McGrath is Founder and Director at C-Suite Pension Strategies. Here, he shares his view on why Defined Benefit pensions are not a black hole but potentially a magic money tree.
£14 billion has been spent every year for over a decade to fund Defined Benefit (DB) pension scheme deficits. £30b of pension liabilities were transferred last year to the booming life insurers. Why? Because derisking is seen as good and the pension regulators are intimidating. But are better outcomes possible?
What if the sector’s “Gold Standard” of life insurance annuitisation is like the Gold Standard of the 1920’s and just an economy distorting bad idea. What if, by seeking to fill up pension black holes, we have actually already created magic money trees. If so, perhaps we should help them grow.
The Prime Minister and the Chancellor have challenged the pension sector to be more help to the UK economy. It can be.
It’s time to take your time with the DB Pension Scheme. Hold on tight to a steady, low risk approach to pension funding; focus on the actual cash required and, as actuarial prudence trues up, very many schemes will have more than enough resource. The question then is how best to divide the fruit of the money tree.
Where are we now?
We are in a better place than we acknowledge. The Pension Act 2004 was a success. It set up the Pension Protection Fund (PPF), raised regulatory standards and forced up contribution levels.
But high-profile corporate failures inspired the new Pension Schemes Act 2021. It has a toughened up The Pensions Regulator who is ready to finish the derisking job.
Responding to all these pressures, investment derisking continues. Back in 2008 54% of money was in equities and 33% in bonds. Now its 20% and 69%. Further, UK equities are now just 13% of the reduced portfolio down from 48%. No help for the UK economy then. UK indexed linked gilts – that’s the expensive asset class of choice.
The priority given to funding DB schemes has consequences. Provision for current employees is at much lower levels and is now on a Defined Contribution basis. Many companies pay far more to supplement DB members than they spend on their current workforce.
‘Get rid’ is all pretty explicable – particularly where the owners are foreign groups who bought UK businesses, dimly aware of DB pensions. It’s hard to make UK investments a priority when the concern is that the ‘legacy’ pension schemes take most of the cash generated.
So for now the winners are fixed income sales teams and life insurers.
Time to take your time and redirect resources
The derisking approach is based on a fear for the future of the sponsor of the scheme. The answer can be to address it directly with a surety style product from a financial institution. Banks and insurers are keen. Capacity and pricing are all attractive. Once in place it means the scheme always has a fall back cash source. Downside addressed, the scheme can use long term actuarial and investment strategies which just factor in more time. That is time in which the high levels of actuarial prudence ‘trues up’.
Having worked in corporate finance and then in CFO and CEO roles in industrial businesses, most notably at Aga Rangemaster, in recent years, William McGrath has been developing new financial strategies for corporates and trustees to make their DB pension schemes work for all stakeholders.
6
SEPTEMBER/OCTOBER 2021
businessmag.co.uk
pensions
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