"Valuation is a Dark Art" Con Keating at TUC Pension Trustee conference 2013

Picture of Con Keating, Head of Research at Brighton Rock making our heads hurt at the TUC Pension trustee conference last month.

Many people nowadays say defined benefit pension pension schemes are "dead".  They are unaffordable, volatile, people are living longer etc. 

Con travels to South Korea as a consultant to set up brand new Company DB schemes despite the Koreans having amongst the highest life expectancy in the world. 

In a nutshell Con makes the argument that the way we measure DB pension investment values and liabilities is just absolutely wrong and schemes have been closed down left, right and centre for no real good reason whatsoever. We should instead measure on a "fair value" approach.

Instead of outdated,  unstable and irrelevant "mark to market" valuation you should be more concerned with cash flows and the ability of the pension scheme to pay its actual liabilities not what it might cost in 60 years hence.

Save Our Pensions (Do you want to be Old and Cold?)

This is one of my branch motions to the UNISON Community conference in March 2013. Which was amended at the last weekends Service Group Executive meeting at York (see last point).

"This conference notes:-

That the Social Housing Pension Fund and the Pension Trust have announced plans to stop many Community employers from offering a decent defined benefit scheme to our members.

They are also trying to massively increase pension contributions to such an extent that many employers are planning to close schemes to future service or pass on these contribution rises onto members. This will make them unaffordable and members will be forced to leave the schemes which will in turn then fail.

The reasons given for taking this action by SHPS and the Pension Trust are that they must protect the fund against rising “pension liabilities”. This is a completely nonsensical argument. It is well known that due to outdated and deficient rules called “Mark to Market” accounting, the “costs” of defined benefit pensions have risen in a totally artificial manner. Schemes usually have to price their costs according to the return on Government loans called gilts. Due to the abnormal economic conditions these gilts currently have negative returns and are at a 200 year all time low. This has meant that pension schemes appear to have high deficits when in fact this has nothing to do with their underlying strengths or weaknesses.

The government has committed to act on this issue but has just failed to do so. The Pension minister Steve Webb promised to do something about what he called this "nightmare" which is "killing" perfectly good pension schemes and that he would "not idly stand by" and let this happen.

Properly run and regulated defined benefit pension schemes are as affordable today as they have ever been. Most defined contributions schemes will not result in members getting adequate benefits when they retire. Our members will die in poverty and the taxpayers will have to subsidise bad employers for their poverty pensions.

Auto enrolling of pension is an organising opportunity for the union as well as a means to fight for better pension provision. .

This Conference calls upon the Service Group Executive:-

To lead a campaign to save our pension schemes from closure. To encourage our employers to stand up to the Pension Trust and SHPS and make them understand that they do not have to destroy peoples pension futures to safe guard the scheme. To also reopen existing closed schemes.

To lead a campaign to ensure that if employers do not stand up to the Pension Trust and SHPS then they should pay the extra contributions which the schemes are unreasonably asking for and not staff.

To lobby the Pension Trust and SHPS to modernise their schemes. For example why does the better off pay less (after higher rate tax) in pension contributions then basic rate taxpayers?

To lobby the Government to change “Mark to Market” accounting.

To examine the case for employers to be encouraged to seek alternative defined benefit provision in our sector and what role the Labour movement can play in this provision. In many other countries trade unions provide pensions.

To consider how to organise effectively around auto-enrolment in our sector and ensure that any defined contribution schemes match NAPF Quality standards plus".

SGE Amendment:

"New point 8

"To campaign for all Community employers and pension providers currently proposing to close their defined benefit schemes or raise contributions, to suspend changes following the announcement by the Chancellor George Osborne in the Autumn Statement of a government enquiry into new ways of valuing pension fund deficits. Some commentators believe this could lead to a reduction in deficits by up to 40%".

Minister wakes up to Pension "Nightmare...Killers"

I'm still catching up after last weeks UNISON Conference bubble only to read that Lib Dem Coalition Pension minister, Steve Webb, has finally woken to the completely nonsensical "mark to market" accounting standards which are (quote) "a complete nightmare" and "killer" for pension schemes.

Private sector defined benefit pension scheme value their liabilities  (how much they owe current and future pensioners) by using the yield of 15 year government gilts (bonds/loans). These yields are at a historic 200 year low due to the Euro crisis "flight to quality" and the governments quantitative easing policy.

"Mark to market" accounting is now completely ridiculous Some pension commentator's are scaremongering since they can make more money out of closing pension schemes rather than keeping them open and because of this some employers are panicking.

I hope indeed that Steve will "not stand idly by" and do something. I am not sure however that his coalition partner's have enough about them to stand up to huge vested interests who appear to be quite happy for decent pension schemes to continue to go to the wall.

Hat tip thingy TGLD

Molins to Workforce: give up your pension...or else!

It was another bad week for employees last week. At around the same time that the Conservative hedge fund multi-millionaire and sponsor, Beecroft, published his report recommending that companies should be able to sack their employees if they don’t like them, Molins, a FTSE listed UK engineering company was found to have threatened its workforce with the sack if they don’t leave their pension fund!

They decided to close their scheme but their trust deeds did not allow it. So they have issued a section 188 notice to the government saying they are intending to dismiss everyone and then offer to re-engage them on condition that they do not join the pension scheme.

Molins claims that that they cannot afford to run its existing defined benefit scheme. Which is rubbish. It is making good profits and is financially secure.

Pension’s Week suggest that there may be a problem with attracting investment but that is not what they are telling their workers. I think it is just cost cutting and they want to cut the wages of their employees with a substandard pension contribution which will not be enough to give their workers enough money to have security and dignity in their old age.

I gave a statement to “Pensions Week” (part of the FT group) as Chair of the AMNT Working Group to defend and promote Defined Benefit Pension schemes. Part of which they quoted

“This is a test to the 2006 pensions regulations, which quite clearly state an employer’s consultation with the workforce has to be meaningful,” said John Gray, Association of Member Nominated Trustees (AMNT) committee member.

“Molins appears to in breach of its own ethics policy. Threatening to sack their staff in order to get out of providing them with a decent pension does not appear to us to be anything like the highest standards of ethical behaviour.”

The AMNT has launched a campaign to support trustees of DB schemes under threat of closure.

What Molins has got to realise is that closing their pension scheme will not make their liabilities disappear. It could make things much, much worse.

Current Pension deficits are worked out using a completely artificial and discredited accounting standard called “mark to market”. Due to a double whammy of recent exceptionally low fund management returns and a 200 year low in the yield of gilts make things appear far more negative  than they actually are.

Not only that but if you panic and close your scheme in response to these meaningless figures then the company faces having to pay even more into the scheme since the fund rapidly becomes cash deficit and has to invest into low yielding bonds and gilts with no equity premium.

Ironically last week I goggled “Molins” and “Pensions” and came across this story from "The Independent" business pages in 1992. The Molins pension scheme was then in surplus by £90 million.

The company was trying to take out £18 million out of the pension scheme to cut company debt and fund acquisitions (and increase benefits). I don’t know if were able to take this money out of their scheme but if they did what would have been the scheme funding now if they did not take out £18 million in 1992?

(NB to be clear this post is my own and not necessarily the views of the AMNT)

UPDATE: Professional Pensions has a good article on this case here