La La Defined Benefit Pension Deficit calculations

I have long been very sceptical about the Daily Torygraph headlines about defined benefit (DB) pension schemes being "in massive deficit", "gold plated" and/or "unaffordable". Check out this paper below by Dennis Leech, Emeritus Professor of Economics, University of Warwick. The way that we calculate the liabilities of these schemes are just nonsense. This means that so called deficits are hugely exaggerated and cause deadly problems to company balance sheets.

Sustainable DB pension schemes have been and are being closed left, right and centre due to broken, La La accounting measures.  Millions and millions of workers are being robbed of their pension futures for no good reason. Robert Maxwell's rip off of the Daily Mirror pension scheme is small beer in comparison .

"Pension deficits: mark–to–market valuation is the elephant in the room

The chief economist of the Bank of England, Andy Haldane, has said he hasn’t a clue about pensions. It is not surprising when so many occupational schemes have a deficit that stubbornly just keeps on growing. They have agreed a recovery plan with the pensions regulator to ensure there will be enough money to pay the pensions promised when they fall due - but still the deficit grows seemingly uncontrollably.

The latest estimate for the total deficit for defined benefit schemes eligible for entry to the pension protection fund was £383.6bn at the end of June 2016, up from £294.6bn at the end of May an increase of £89bn in one month. The combined funding level has fallen to 78 per cent, close to its lowest ever level. There were 4,995 schemes in deficit and only 950 schemes in surplus.[1]

The blame for this is most often put on the fact that pensioners are living longer than expected. But that is not convincing and can be only part of the answer: deficits are changing too fast to be due to something as slow moving as longevity trends - that are anyway allowed for in the recovery plans that have been devised. The other explanation often trotted out is the catch-all ‘market conditions’ which covers a multitude of factors. This usually means low interest rates, casually and wrongly equated with poor investment returns.

No. It is the regulations governing pension scheme valuations that are mostly to blame for this unsustainable situation. They are the elephant in the room of the pension deficits story that is being ignored by most of the industry. They are not fit for purpose and urgently need to be revised. They force pension schemes to have to deal with extraneous – even spurious - risk factors which exaggerate deficits. The effect – as we have seen in recent years - is to force many schemes to close.

Deficits have grown substantially since the 1990s when minimum funding requirements were introduced. The 2004 Pensions Act set up the pension protection fund to reduce the risk of pensions failing due to the sponsoring company failing. But it also tightened up on funding rules and imposed an inappropriate market-based valuation methodology[2]. Accounting regulations based on this methodology are at variance with real-world economics. They are based on a purist belief in markets as a source of information - ignoring all evidence from academic economics, both empirical and theoretical, showing the limitations of markets as providers of information. They were intended to prevent pension schemes needing to enter the pension protection fund but in fact have had the reverse effect by making sponsor failure more likely.

It is only policy makers who can deal with this problem. They need to take an overview of the consequences of mark-to-market accounting and revise the valuation regulations in the light of experience.

... To continue reading access the full paper here or here.

"Breaking the LGPS out of its pre-Maxwell time warp"

Check out UNISON Dave Watson post "I was speaking in a panel debate on governance at a well-attended Scottish Local Government Pension Scheme (LGPS) conference in Edinburgh today.

The LGPS is facing some major changes to governance structures and pension funds are focused on what this means for the existing funds. The essence of my argument was that the LGPS is stuck in a pre-Maxwell time warp.

For those not familiar with the history of pensions governance, Robert Maxwell committed a massive fraud by plundering his employees' pension funds in order to shore up his companies. As a result, pensions law changed to include better member representation on pension funds and a legal separation from the employer.

This has been followed through in European law through the provisions of the IORP Directive. The LGPS is probably the last pension fund to operate with limited member representation and there is no separation from the administering authority.

The pensions committee of Scotland's eleven funds are simply council sub-committees with councillors making the decisions. UNISON believes the current structures are unlawful, but they have to change anyway to comply with the UK Public Service Pensions Act.

A consultation paper that sets out the issues will be published this week. Even more challenging for the current funds is the concept of scheme merger or at least shared services. UNISON has commissioned expert evidence that leads us to believe that larger funds perform better and reduce investment costs.

Paying £millions to the same 'masters of the universe' who created the financial crash, is a particular concern to our members who are suffering the consequences with pay and job cuts.

Interestingly, another presentation at the conference came to a similar conclusion on external fund management costs. In the current financial environment, paying too much to fund managers means even bigger cuts in services.

The same applies to poor investment performance. In addition, we could use the £24bn of assets in the Scottish funds for useful local investment, rather than investing almost half of it abroad.

Strengthening LGPS scheme governance is long overdue and members have a right to have a meaningful say in the decision making process".

"Will no one rid me of these turbulent Member Trustees!"

I've been sent a rather odd and disturbing link to a story here on "Engaged Investor" magazine's website.

In which a pension consultant is quoted as saying he understands that the Government is maybe thinking of getting rid of Member Nominated trustees who sit on Pension scheme Boards???

So who will replace the  representatives of those who actually pay into the pension scheme and act as the owners of their capital? Let me think now? - perchance, more highly paid consultants?

The timing seems most peculiar, since the Government has recently agreed to a significant increase in member nominated representatives (MNR) in the Local Government Pension Scheme and is making promising noises about giving more powers to MNRs in Governance Committees for Contract based pensions schemes and Master trusts. I fully expect the next Labour Government to continue with this process.

I actually support the important role played by professional advisers and consultants in running pension schemes and think many of them are honourable and genuinely want to do the right thing for us. However, there is no getting away from the fact that we have the fiduciary duty to our beneficiaries and they do not.

But as the full article in Engaged Investor makes clear, never forget the reason, why the requirement for member nominated trustees came about in the first place. The picture above is of Bob Maxwell in his famous yacht a year before his death, who stole hundreds of millions of pounds belonging to pensioners.This resulted in legislation that requires at least 1/3 of member trustees make up the Board.

The institution of trusteeship in this country is centuries old and although not perfect is still fit for purpose. Our primary role is to ensure that the money we hold in trust is held for the benefit of the beneficiaries and not be totally ripped off by those who are paid to manage our money. Even Adam Smith (not someone I normally cite on this blog) would have understood this.

In the past some trustees have not been properly trained and supported and have been held back on Boards. The requirement to have member representation and the growth of trustee based organisations such as the TUC Trustee network and especially the Association of Member Nominated Trustees (AMNT) will help counter these problems.  

Anyone who opens a newspaper or who turns on the telly to watch the news, will be aware on practically a daily basis, that we actually need more member trustees and representatives looking after all aspects of our money - not less.

UNISON NDC 2011: Protect our Pensions Fringe

On Tuesday lunch time there was a very well attended fringe on "Protecting our Pensions".  It was chaired by NEC member Steve Warwick, Roz Norman (Health service Group), Glyn Jenkins (UNISON Head of pensions)and Mo Baines (LGPS Pension rep). 
I missed the beginning.

In the Q&A I asked whether or not the true cost of past employer contribution holidays and lower than needed contributions had ever been calculated by the unions? If employers had always paid what they should have paid, what would our schemes look like now? 

I had been to a conference recently were it was asserted by a well known financial figure that £50 billion pounds had been taken (stolen says I ?) from final salary schemes due to past contribution holidays and reductions. Glyn responded by say thing he thought such a figure seemed plausible but he knows that for many years - employers paid far, fair less into schemes than employees.

My argument is of course that if the employers had paid in the traditional 10-12% of earnings into occupational pensions schemes every year for the past 30 years then things would look very different in the pension world than they do now. 

In other words many pension scheme members face now being Robert Maxwelled (aka robbed) due to the past misappropriation (theft?) of contributions?

“Captain Bob” threat to Council Pension funds

UNISON was quoted in last week MJ attacking Council pensions schemes who delegate investment management to one single officer. There 8 funds that do this out of the 90 odd (some very) LGPS including the huge Surrey Country Council pension scheme (I have UNISON members who belong to it).

This sort of practice was outlawed in the private sector after the Robert Maxwell “Daily Mirror” pension scandal. Private sector pensions schemes now have to have 1/3 representation by beneficiary trustees by law.

Many other Council pension schemes do little better than the single officer schemes since they still have no meaningful representation of scheme members on their investment panels or committees whatsoever.

There are other significant problems with the failure to separate pension and council bank accounts and the issue of co-mingling!

I think that these Councillors and chief officers are taking completely unnecessary and enormous personal risks by allowing such poor governance. Why they do this continues to astonish me?

One day, as sure as eggs is eggs, somewhere - it will all blow up in their faces.

Thankfully my scheme has started to introduce member representation with voting rights.

I have covered this issue just a few times already (here, here and here).

“The Battle for the LGPS Governance”

Today I went to the first UNISON national seminar on the Local Government Pension Scheme (LGPS) -“Representation and Governance” in central London.

While I appreciate that for some strange reason, many folk do not appear to value the governance arrangements of the LGPS. I and about 75 others from across the land disagreed and had made our way to the NUT headquarters in Kings Cross to take part in this event.

The seminar was chaired by UNISON NEC member Jane Carolan and the opening speaker was UNISON General Secretary, Dave Prentis. Dave pointed out that the LGPS had an estimated 3.6 million members and the total value of all investments in the scheme was around £125 billion. How well this scheme is run is actually of importance not only to scheme members, but also to some extent, the wider British economy.

There was a number of speakers including the “enemy” (joke of course) CLG civil servants Bob Holloway and Terry Crossley. By co-incidence, both the CLG and UNISON speakers, used the same photo of the first major pension thief, Capt Bob Maxwell, in their presentations. He of course, stole hundreds of millions of pounds, from the “Mirror” pension scheme.

The presentation on the LGPS and EU Directive 41 “Institutions for Occupational Retirement” (aka “IORP”) was, believe it or not, absolutely fascinating.

In the past there has been a dispute between senior civil servants and union negotiators whether the LGPS was a “Bath” or a “Sausage machine”. Today, we also learnt that there was a discussion on whether or not it was a “duck” as well? The plot thickens.

It’s getting a bit late and there was too much to post tonight. So I will post various stuff I found interesting later on in the week.

Update: I forgot to mention the Maxwell connection and the LGPS. In order to stop pensions theft and other bad practices the Government commissioned the Goode Report. One of the recommendations of this report was that the LGPS should have staffside representation with statutory rights (short of voting rights). However, due to "opposition" from employers this was never implemented. Why?