Con Keating | Comment


als, not an accurate representation of reality.


What is perhaps unusual about USS is that their


published narratives are heavily


larded with jargon, buzzwords and pseudo- scientific trappings; traits shared among many missives from The Pensions Regulator.


There have even been reports in the national press of explicit, and uncorrected, misrepresentation by USS. By contrast, The Pensions Regulator’s narrative is more subtle and nuanced, and in the main con- tained to its guidance notes. An


illustration is appropriate. Their


November 2018 Investment Guidance paper states: “The fundamental purpose of your investment powers is to generate returns in order to enable the scheme to pay the promised benefits as they fall due.” While the Occupational Pensions Schemes (Investment) Regulations require: “Assets held to cover the scheme’s technical provi- sions must also be invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the scheme.”


There is a significant difference here. The primary duty of a trustee is to secure the accrued benefits, and technical provisions are one (overstated) measure of the current value of those liabilities. The transposition from the immediate to the prospective is problematic, particularly so in the case of sponsor insolvency. A company cannot make provision today for situations which eventuate after


its insolvency, and if it


attempts this, the insolvency administrator should intervene.


This makes the current pursuit of the intro- duction of long-term funding targets for schemes profoundly problematic; a topic which incidentally provides another exam- ple of linguistic contortionism. Funding to self-sufficiency levels has become


low-dependency (on the sponsor covenant) in regulator-speak. Make no mistake, this shift of objective will have profound cost implications; a recent study by XPS Pen- sions estimates the newly required funding at £100bn if weak long-term funding tar- gets (gilts + 75bps) are adopted, and £265bn if strong targets (gilts +25bps) are pursued. Now the section 75 value, the cost of buy- out in the bulk annuity market, may define the amount of a scheme’s enforceable claim (after deduction of the level of scheme funding) on the insolvent estate, but this is inequitable to other creditors of the insol- vent sponsor. The prospect has resulted in those other creditors taking security, or pri- ority positions in the claims waterfall, and even some of the more extreme pre-pack arrangements.


The weakness of the status of overfunding objectives has been indirectly recognised by the regulator, notably in its recommen- dation: “Where possible the contingency plans should include legally enforceable rights of recourse.” Such a course of action would have no effect on the recovery in insolvency, but it would put the scheme in conflict with a sol- vent but struggling employer. It could also further complicate the matter of dividend policy and corporate strategy. It is hard to see how this is compatible with the regula- tor’s statutory requirement “to minimise any adverse impact on the sustainable growth of an employer”. Much of the debate surrounding the USS valuations has centred on their self-suffi- ciency target, and there has been a scholas- tic debate of the covenant supporting the scheme. However, by any reckoning, this is strong, though this has not stopped Trinity College, Cambridge, from paying the cur- rent section 75 value and withdrawing. Their apparent concern was that they might become the last man standing and face


harm to their endowment fund. It would be interesting to know where this ranks along- side other similarly improbable existential threats to that fund, such as actions for res- titution from the monasteries, from which it was originally sourced.


The idea of overfunding and low depend- ence upon the sponsor covenant defies simple reason. The greater the financial strength of the sponsor, the greater the reli- ance we may place, confidently, upon the sponsor covenant. Indeed, if there is any action warranted, it may be for enhanced terms to members’ employment benefits. For the financially weak, further demands for scheme funding merely exacerbate the situation, and forbearance is likely a far superior strategy. The Pensions Regulator’s latest foray is into scheme governance. It introduces the expression “savers” for all scheme mem- bers. This may be appropriate for defined contribution (DC) arrangements, which are merely tax-advantaged savings schemes, but is it for DB scheme members; they have purchased a pension. The regulator wants to see fewer, better governed schemes. Good governance may make for better DC schemes and benefit their savers, but it is irrelevant to DB scheme members. There is a staggering admission: “The evi- dence that the current system doesn’t work for all is stark.” This is after a decade of reg- ulation and supervision by The Pensions Regulator; a decade in which it has presided over, and continues to aid and abet, the demise of DB pensions. It has promoted the incomplete and inadequate alternate of DC schemes. It appears not even to have learned the elementary lesson that hard cases make bad law.


These are governance failings of the first order, but such is their hubris that they feel qualified to set themselves as authorities for the rest of us.


Issue 85 | June–July 2019 | portfolio institutional | 17


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