Sponsors are taking an unrealistic view on pension scheme deficits assuming yields will rise, argues Steve Delo
Oh, the woe of a new year is thinking about one’s weight.
Alas, this subject came up on New Year’s Eve and my best mate and I foolishly admitted we were yearning to drop some poundage. Our respective spouses latched on to this and, as midnight chimed, both of us had committed to dropping a stone by Easter.
So, the game is on and I am now watching calories like never before. I therefore suggest that any industry contacts trying to tempt me with me a lunch, dinner or drinks session ought to wait until Q2.
I am, at this early stage, fairly bullish. A few early ounces have gone, I have savaged my alcohol intake and even booked a health check. Hence, my mindset is right (for once).
Why doesn’t this sort of ‘I won’t believe it until I see it’ common sense apply to DB pension funding?
Of course, things can change, you will say and I could easily have fallen off the wagon by mid-February. I doubt, therefore, that anybody will place money on a leaner version of me ushering in the next tax year with confidence.
And I wouldn’t blame them.
So why doesn’t this sort of ‘I won’t believe it until I see it’ common sense apply to DB pension funding?
Several valuation discussions I had last year involved the following stance taken by the sponsor – (a) your (the trustees’) deficit calculation is way too high because (b) it is based on yields that are at lows well below the long-term norm and (c) when the yield curve shifts back up towards the norm, the problem falls away so (d) we don’t see why we should pay more contributions. So ‘naff off.
It is rather like me taking advanced credit for my weight loss”
The trustee then says they can’t do that because it would involve taking advanced credit for a reversion that may or may not happen to a long-term norm that may or may not be the long-term norm.
It is rather like me taking advanced credit for my weight loss. I am convinced I will be a stone lighter come April, so let’s get the tighter trousers ordered.
The sponsors’ position is like me turning round to my wife and saying: “Don’t call me chubby. I’ll be a stone lighter in three months so how can I be anything other than slim and fit? Now, let’s go out for that curry.”
This all comes from the actuarial exchanges during the valuation process. Scheme actuaries help trustee boards develop their technical provision assumptions and these will vary to some degree. They are akin to weighing in on slightly erratic scales – they give you a range of weights, but all within a broadly reasonable bandwidth.
Yields for pensions may change for the better. If they do, great – companies can make a stand then. Until then, it’s all marked to market”
But then the company rocks up with its own actuarial adviser that has a set of scales that deliver a result that is wildly different to the trustees’ one, thanks to sometimes absurdly optimistic stretching of the assumptions.
“What do you mean I weigh somewhere in the 14-14 ½ stone range? I just stood on my adviser’s scales and weighed 11st 3. Average for my height. I don’t need to lose anything! Let’s order more roast potatoes!”
I am waiting for these principles to take hold at home. I can imagine my eldest son, now 11, turning around and saying: “Daddy! I am taking advanced credit for the PhD in quantum mechanics I shall be securing in 2030, so I therefore won’t be doing my homework project on how a light bulb works.”
Yields for pensions may change for the better. If they do, great – companies can make a stand then. Until then, it’s all marked to market. I might be thinner come April but, until then, the suits are going to remain a squeeze.
Steve Delo is chief executive of PAN Governance and former president of the Pensions Management Institute