Pensions insight
Are pensions in crisis?
Henry Tapper, founder of Pension PlayPen, says no and explains
T here has been talk of late of pensions in crisis, but in fact the opposite may be true. Pensions may finally be getting back on their feet. News that Philip Green, the retired tycoon, has made a voluntary contribution of £363 million into the BHS pension scheme is a relief to BHS pensioners but also to the pensions system that has been found to have a mechanism in place to deal with egregious behaviour. Sadly, my colleagues in pensions continue to argue both that there are 1,000 BHSs waiting to happen and that our system of occupational defined benefit (DB) pensions is an accident waiting to happen. But the actual state of these schemes, measured on what actuaries call a ‘best estimate basis’, shows that on average most schemes are not in danger of going bust unless the sponsoring employer does. My company has been publishing an alternative index to rather gloomy figures put out by the Pension Protection Fund (PPF). The £400 billion black hole that the PPF quote is based on schemes being wound up, but our alternative index is based on schemes continuing to operate with their current investment strategies. Our figures (see the table) suggest that funds on average don’t even need an investment term that matches inflation (a ‘real’ return) to pay every pensioner in full. There appears to be some support for this more optimistic view within the policy units of the Department for Work and Pensions. In February, the government published a
green paper which referred to the FAB Index (the First Actuarial Best-estimate Index ) that questioned whether we were in a pensions crisis and though it discussed the possible dilution of pension benefits where employers were particularly distressed, it didn’t conclude that this was necessary. The paper also questioned whether The Pensions Regulator needed to be given extra powers. ...on average most schemes are not in danger of going bust... There is unanimity that the two major pension initiatives of the past fifteen years, the establishment of the PPF and the installation of automatic enrolment, have been successes in terms of conception and execution. If we add to this the largely successful integration of the state second pension and the basic state pension into a single state pension, then it could be argued that the state of UK pensions has improved markedly in the opening years of this century. Certainly we have moved on and Philip Green has not been a ‘Robert Maxwell’. However, there remains a deep issue which troubles politicians, actuaries and pension scheme fiduciaries alike. There is not the confidence among the general public in the pension system to encourage voluntary savings to anywhere like the levels needed to see replacement incomes above the current projected average of
38% predicted by the OECD for 2050. If we as a country feel comfortable taking a 62% pay cut when we quit working, then the low replacement ration is not a problem. But ask any working person today if they were happy to sustain such a cut and I doubt all but a tiny minority would be prepared to accept it. In truth, most of us will need to supplement our pension income with part-time work or have a successful plan B such as a proper buy-to-let portfolio. The issues of adequacy are not going to go away until people choose to use the generous tax reliefs on offer to those saving using pensions. Working longer may be a solution for those who can work but there are limits to our health and to the labour market for older people. The Institute of Fiscal Studies has pointed out that if older people do not retire, younger people may not be able to get the jobs (let alone the houses) to save for their retirement. Some point to compulsory pension contributions as the answer, yet others to an increase in the default contribution rates for automatic enrolment. I suspect that there is no appetite for compulsion in big government, as it flies in the face of pension policy over the past sixty years. Instead, I expect to see a focus on the supply side of pension. Increased government pressure on pension governance, transparency of costs and charges and a drive for greater innovation through the use of the block chain in the settlement of pension investments and payments. Coupled with this I expect to see demand from consumers for better ways to manage their pension savings and in particular demand for non-advised products that convert the capital in pension pots into the income needed to allow us to stop work. n
‘Breakeven’ (real) investment return
FAB Index over the last three months
Assets £bn
Liabilities £bn
Surplus £bn
Funding Ratio
1,467 1,192 1,476 1,206 1,443 1,147
275 270 296
123% -0.6% pa 122% -0.7% pa 126% -0.6% pa
31 January 2017
31 December 2016 30 November 2016
37
Issue 29 | April 2017
| Professional in Payroll, Pensions and Reward |
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