Decent pension provision is not dying out - it's being murdered

A headline in last Friday's "Professional Pensions" was "DB surplus hits record high of £382bn on best estimate basis, says First Actuarial"

It is becoming increasingly clear that the the huge decline in decent pension provision in the UK (employer defined benefit schemes) is mistaken and even completely unnecessary. Millions of workers in this country will retire and die in poverty because of this.

Pension schemes were valued according to outdated and irrelevant accounting measures which pretended that they had huge unmanageable deficits. It was a little bit like telling someone who had just taken out a 25 year mortgage to buy a home that they were really bankrupt since they could not immediately pay off the loan.

6 years ago the AMNT argued that defined benefit schemes were affordable and stopping workers from joining or closing schemes was a nonsense.

Instead of using a broken yardstick to measure present and future costs, First Actuarial, have produced an index based upon a prudent estimate of investment performance. They calculate that the 6000 defined benefit schemes left need an actual return of only 2.6% per annum to pay its pension promises. While the stock market will go up and down, unless you honestly believe that the end of capitalism is nigh, surely in the long run, this return is more than achievable.

Last year there was a series of bitter strikes by University staff opposed to the dismantling of their supposedly bankrupt pension scheme USS. Under best estimate calculation they could have a surplus of £10 billion.

If you think I am angry about this situation then read below Death by Discount Rates

"Discount rate controversy is nothing new. One rarely, if ever, hears people in the industry say that using the yield on high-quality corporate bonds (as accountants do), or a rate just above gilt yields (as most actuarial valuations do) is without problems.

But the flaws are more serious than many realise. The theoretical case for these rates is acutely defective. They have wrecked company balance sheets, caused the misallocation of billions of pounds of corporate resources to plug illusory deficits, distorted scheme investment strategies, and played a major part in the collapse of private DB provision. If a disaster even a fraction of the size had befallen the state pension system, governments would have been voted out of office. It's a national scandal."

Frank Curtiss is the immediate past president of the ICSA and the former head of corporate governance at RPMI Railpen. Tim Wilkinson is the former chief accountant at RPMI Railpen

The one spark of possible good news for Pension funds (buried amongst the misery of Osborne's statement)

"Discount rate consultation decision could be a lifeline for DB schemes says the AMNT"

The Association of Member Nominated Trustees (AMNT) has expressed its full backing of the decision of the Department for Work and Pensions to move forward with a consultation on discount rate smoothing, announced in yesterday’s statement by Chancellor George Osborne.

Janice Turner, co-chair of AMNT, said: “This has been one of the key campaigns run by the AMNT throughout the two years of its existence and is what long-suffering DB pension scheme trustees have been desperate to hear. The prolonged recession has left trustees and employers facing unprecedented circumstances with deficits so volatile that countless DB schemes have closed and, in some cases, even toppled their sponsor company into closure.

“It is very pleasing that Steve Webb has been the first Pensions Minister to grasp this particularly painful nettle, where others before would not. It is now important, however, that the process should not be dragged out as a stalling mechanism whilst more open DB schemes close. The AMNT will now be working very hard in the coming months to put forward and argue strongly for a responsible alternative to the current unworkable regulations.

Turner continued: “The result of this consultation could be that billions are wiped away from DB pension scheme deficits leaving companies better able to invest in their own businesses. It could be a lifeline for DB pension schemes and aid the recovery of the British economy. For this reason we hope that those thinking about scheme closure will seriously consider awaiting the results of this consultation before taking any permanent decisions on the future of their scheme.”
-ENDS –

Updated AMNT press release. 

My take on this is that it is estimated that the introduction of smoothing and other measures proposed could improve the funding position of defined benefit pensions schemes by 20-30%.  So it is inconceivable that any pension fund should carry on with any plans for closures until the enquiry is concluded.