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Interview – Jane Hutton


sion is that TPR doesn’t interact effectively with the Government Actuary’s Depart- ment (GAD). That department produced advice on setting the personal injury dis- count rate for the insurance industry. In the current market environment, a portfo- lio invested in gilts is not risk-free, and GAD notes this is pertinent to pensions. But TPR told me that this advice on investment in gilts doesn’t apply to them. Ultimately it is about power and control. As statisticians we had similarly hostile responses


when we started getting


involved in medical research and legal practice. It takes time. A lot of people may also be acting in good faith. They may be getting things wrong but not necessarily deliberately so. Often they don’t have the training in statistics to get things right. So with some collaboration they could do a lot better.


USS’ investment returns have been quite stable, so why did the deficit fall from £7.5bn to £3.6bn between 2017 and 2018 and then double again to £6.6.bn in 2019? The methodology hasn’t quite stayed the same. The 2014 and 2017 valuations had changes in methods. The most significant were probably the stochastic model, which is something that ought to be fully documented before any valuation is signed off. And then the estimates of life expectancy are important as well. But the main point is that what you should be presenting is not a single number. You should be presenting something that gives different scenarios; given different life expectancies, for example. When the Office for National Statistics presents data on life expectancy, they have a principal table and a low and a high table with dif- ferent possibilities. It should be routine to give different scenarios. It would also be a good idea to engage with pension schemes and actuaries in other countries and ask how they are approaching the valuation of pension funds.


You raised your concerns about a lack of 20 | portfolio institutional March 2020 | issue 91


access to USS’ data in 2017 and reported it to the regulator in March 2018. What sup- port did the regulator give you? Neither the Pensions Regulator nor the Financial Reporting Council has yet com- pleted


their investigations. But they


haven’t come back to me. I only went to the press three years after first expressing concerns. I gave the regulator over a year.


How can the presence of member-nomi- nated trustees help? Trustees should come from a diverse background. That is the thinking behind a paragraph in the 2006 Companies Act which talks about the importance of inde- pendent opinions.


In the Carillion scandal, there seemed to be a mismatch of power and information between member-nominated trustees and the board. What could be done to empower trustees and help them hold the board to account?


I would have liked to train trustees but access to data is crucial. The case of Caril- lion is a good example. It would be inter- esting to know what access to information their trustees had. What the regulator needs to do is to support trustees to access information.


Would you say the gilts plus approach is overly cautious? Yes, it is important to see pensions as part of the wider economy. If you only think about pension contributions but are bank- rupting companies which offer defined benefit pensions, then that is not a good policy. One of the problems with the gilts plus model is that if you try to base forecasts of investment returns on gilts, when schemes are actually invested in a lot of other assets, you can get serious errors. And if salary and mortality rate estimates have rounding errors, there is a cumula- tive effect which can be misleading. There are alternative methods to forecast investment returns that do not involve


just assuming pension schemes are


invested in negatively yielding gilts. The worst thing the regulator does is describing this approach as de-risking. It is not de-risking; it is moving risk around. This is shifting all the risk onto the indi- vidual and effectively saying that they will not have any assured pension. If you are going to say, as TPR seems to, that your main priority is that no one ever uses the Pension Protection Fund, then the flipside of that is that people will have no promised benefits. Because if there are no promises, you have no responsibility.


So you are talking about a shift to DC? Yes, there is an interesting paper from Canada, when it looked at the possibility of public funds shifting to DC from DB. The paper looked at several different stakeholders and concluded that every single group is worse off.


The only reason there is a benefit to the private sector is because you are offload- ing your responsibilities onto the state. Closing BHS and British Steel increases unemployment, demand on social services rises. We know that unemploy- ment is bad for your health. I am not sug- gesting you prop up completely failing institutions but if you do what the pen- sions regulator wants to do, which is to focus only on having enough money for the pensions, that creates problems. The 2014 Pensions Act attempted to mitigate some of these issues. The Pensions Regulator is operating a regime in which they say: “We want you to have an insurance policy for your pen- sions in case you go bankrupt, and by the way, we are going to set the cost of the insurance policy so high that we’re going to guarantee that you go bankrupt.” Other authors, including Ian Clatcher, Con Keat- ing and Anna Tilba have also pointed this out.


Whereas, the research on Canada is say- ing if you are going to do this, nobody will benefit. Therefore, going to DC is clearly not a good solution. The report also men-


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