Con Keating | Comment


national insurance to “unearned” income, which of course is better referred to as investment income. There is no indication whatsoever of the effect this would have on the level or cost of investments, which of course is of primary benefit to the younger generation.


The report does not note that this sum is in fact an investment in government, without which many public services and invest- ments would not exist. There’s circularity to arguments for the funding of public sec- tor pensions; borrowing in markets only to then invest those funds in markets. The report goes on to make six recommen- dations.


The first is to disqualify those with pen- sions greater than £50,000 from the state pension, which they have contributed to through their national insurance contributions.


The second is for higher contribution rates. The logic of this escapes me, as it is the already accrued rights which are of issue. The third recommendation is to extend


The fourth states that more joined-up measuring is needed. At present these fig- ures are not collected by central govern- ment, despite the figures in the report were collected from government. Recommendation five is to raise the state retirement age more quickly. While this would affect the state pension, these are occupational pensions and we no longer have compulsory retirement ages. The final recommendation is an old chest- nut, namely limiting the tax-free lump sum to a fixed amount. This would need to be far broader in application than simply the pub- lic sector; it would also affect the property rights of private sector employee savings in DB and defined contribution (DC) arrangements. Pensions are a significant element of the overall remuneration packages of public sector employees, altering them retroac- tively is deeply problematic. It is no differ- ent in principle from the idea that as gilts are costing us too much to service, we should cut the coupons and repayment amounts.


There are other strange ideas in the report, such as: “Where there is a real fund and pensions are limited to those assets, then the hard decisions have to be made and put into effect – for instance, the Universities Superannuation Scheme (USS)…” In fact, there are no DB schemes in the UK limited in this manner, and USS certainly is not. In fact, this arrangement is central to collec- tive defined contribution (CDC) schemes for which we await enabling legislation. In this report, there is a deep confusion as


to the role of discount rates, which is shared by The Pensions Regulator. The discount rate applied to existing pension liabilities does not affect the cost of provision of those pensions; it affects only the amount we choose to recognise at a point in time. The cost was determined by the terms of provi- sion, the contributions made, even if notional, and the benefits specified. The only way discount rates may affect the true cost of a pension would be if we took actions based upon them. And this is exactly what The Pensions Reg- ulator would have us do. In a speech at the recent First Actuarial conference and in a blog on the regulator’s website, David Fairs, its director of regula- tory policy, analysis and advice, offered some insight into the proposed new DB funding code of practice. The new scheme’s long-term objective (LTO) introduced in the Department of Work and Pensions’


Protecting defined


benefit pension schemes white paper will lie at the heart of this code. To quote: “We plan to consult on options for a clearer framework, including what we see as a suit- able LTO. For closed schemes, this will include ideas on how they should seek to progressively reduce their reliance on the employer covenant over time and reach a position of low dependency by the time they are significantly mature.” This confirms our worst fears of increased and ever more costly funding requirements for DB schemes, and will ensure that no new DB schemes are created for the benefit of younger members for many lifetimes. It is an unwarranted, unsupported fund-cen- tric view of the scheme.


The common theme to these reports is that the pensions contract should be regarded with deep scepticism. It can no longer be regarded as sacrosanct and may well be changed to your disadvantage.


Issue 84 | May–June 2019 | portfolio institutional | 17


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