Whenever I write about defined benefit pension schemes, as I do on occasion, there are a persistent group of trolls who turn up here to suggest that I am a complete idiot who knows nothing about what I am writing.
Some of these people, whose names I recognise from past exchanges, appeared here yesterday when I posted on the subject of the government's plans to allow the companies that sponsored such schemes to now extract surplus value from them to encourage investment in the UK.
The comments each made were remarkably similar, which suggests that either they were coordinated, or that there is a remarkable lack of diversity of thinking amongst the UK's actuary population, of which all these people appear to claim they are a part. The suggestions were:
1. Surpluses in defined benefit pension funds can be very accurately calculated because most are now in what is called run-off i.e. there are no new scheme members, and therefore very accurate calculations of anticipated liabilities can be prepared, and investment strategies to match these liabilities can be produced, essentially relying upon portfolios of government bonds to create this outcome.
2. Any surplus over and above those now calculated on this basis to be required to settle these estimated liabilities does not belong to pensioners, but must belong for the company that sponsored the pension scheme, who therefore have an entitlement to it, and this is legally the case.
3. I am an idiot for suggesting that this is not the case.
As those who followed these exchanges will have noted, I have given those who made such comments short shrift, because I think they have made some fundamental mistakes.
Firstly, if what they claim was true was in, in fact, the case and the surplus in these funds did already actually belong to the companies that sponsored them then there would be no need for the government to take action to permit those funds from being withdrawn by the sponsoring entities. It is very obvious that this is not in fact the case at present. A change in the law and in trust deeds will, in many cases be required to make this possible. The claim made by those commenting with seemingly one voice is, this in that case, therefore, inherently wrong because it is obvious that action by the government is required. The certainty that those claiming superior knowledge with regard to this situation is, as a consequence, utterly misplaced. They are, in fact, wrong to make their claim. The law does not support what they say.
Secondly, the claim that these people make that it is also precisely possible to estimate what might happen in these funds is also fundamentally untrue. I know that these calculations are undertaken, because I also know that these funds can be bought and sold, with those undertaking those transactions gambling (there is no better word) on the ability of available funds to meet the contractual obligations which are implicit in the relationship between the actual and prospective pensioners and the fund itself. Anyone who does, however, think that because it is possible to prepare a calculation of the estimated liability of a fund based upon current life expectations within an identifiable population, who might, however, have unknown health complications, when, as a matter of fact life expectation is currently supposedly subject to significant variation as a consequence of trends, both up and down, is talking complete nonsense. The assumptions made by an actuary might, within a range, appear entirely reasonable. Every known risk might have been taken into consideration, but as I persistently pointed out, risk is not the only factor that needs to be taken into account. Uncertainty is also a factor. Risk is probabilistic. Uncertainty relates to things that cannot be known. If anyone actually thinks that no uncertainty exists with regard to the life of populations then they are, in my opinion, decidedly foolish, and I am entitled to say so, and did.
Thirdly, anyone who believes that a model that matches supposed liabilities with supposed income is most unwise. Would I, for example, assume a pension annuity to be risk free? No, I wouldn't. Evidence is on my side.
This is precisely why a fourth concept is of relevance. As I pointed out, repeatedly, what has to be taken into consideration is the obligation of pension trustees to exercise their fiduciary duty to the pensioners. There are, I gather, still some 8.8 million of these in the UK. This is no small issue, and fiduciary duty means that pension trustees must put the interests of pensioners above all else in their considerations. It is clear the government, companies, actuaries and advisers are all ignoring this duty. Pensioners appear to never get a look in. I suggest that is not just wrong, but is massively wrong. If there are surpluses, and even with hedging, they must be retained when so many are so dependent on these schemes, from which many of the sponsoring companies have long departed.
Am I, as a result, entirely happy with my responses to those who commented? Yes, I am.
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If these people really are actuaries involved in the management of DB pension funds, I think the Pension Regulator would want to have a serious word with them, especially in relation to Point 2.
I missed this debate first time round, and am genuinely puzzled why actuaries adopt the position they have taken. I presume that this is only an issue because the funds in Pension Funds belong to the Pension Fund, and not the investing company. The actuary’s prime obligation, it seems to me, is to attempt to ensure that the benefits to pensioners are guaranteed to be 100% safe, for the life of all the pensioners. That means the Pension Fund should keep all surpluses in the fund, to cover all risks, and uncertainty. Many Pension Funds have shortfalls, and companies do not immediately pay the full amount of the shortfall. Some companies wouldn’t survive if they did; they are allowed to reduce the shortfall over many years in the hope the shortfall eventually will be filled. Any Pension Fund with a shortfall is therefore at risk, because the company may not survive long enough to eliminate the shortfall, simply because of the scale of the shortfall or the futre business prospects, or survival of the company. If there is a surplus in the fund when the last pensioner dies, then (it seems to me) the investing company may have a claim to the remaining funds; but perhaps the estates of the pensioners may have other views, and I leave that conundrum to the lawyers.
I find it extraordinary that actuaries, who represent Pension Funds, while they are prepared to accept shortfalls (in order to protect not just the Pension Fund, but the funding company); in the case of surpluses, are prepared to increase the Pension Fund’s exposure to uncertainty, in order to serve the convenience of the company. If the risk and uncertainty were capable of being worked out with sufficient precision to eliminate both risk and uncertainty, then the funding company would not have over-invested to produce a surplus in the first place. A question to be asked, if actuaries have such a commanding insight, is how the surplus transpired? Surpluses, once delivered in any case provide additional security to Pension Funds, notably for extreme unplanned events, and uncertainty (like the LDI fiasco?).
If a Pension Fund is properly run, and currently has a surplus, should it return the surplus and rely on the permanence of the limited liability venture going forward, and its ability to fund any future shortfalls that may arise, in part perhaps because of its business decisions; or rely first on the security and guarantee provided by retaining the surplus that is under the Pension Fund’s control, and only secondly on the future business risks to the funding company? As a pensioner, I know what answer I would prefer to hear.
The road to pensioner hell has been paved with pension fund failures, and with businesses that have preferred to consider its pension fund as a savings account opportunity . In better days, when there were Mutual Pension Funds, there was little debate about surpluses.
Thanks, John.
That’s a good thought experiment John – i.e. what happens to the surplus in a DB Pension Fund when the last pensioner dies. A well managed fund would spread its risks across the years and asset classes to mean there is no or little surplus or debit in a fund but it’s a good intellectual exercise to ask this question:
Suppose the last few pensioners in the scheme die unexpectedly, and the same year the fund has done spectacularly well with double digit increases. We then have noticeable pot and no living pensioners entitled to it.
Who gets the money?
Perhaps the ‘trolls’ from yesterday could be invited back to explain what the law says on this.
It will depend on the scheme rolls
My suggestion would be the pension lifeboat should get the sum.
It is not always the case that someone who disagrees with you is trolling. Reading back the exchange, as it happens I think you and the commenters (whether or not they are actuaries) both have a point.
Legally the ownership of funds in a pension scheme is governed by its trust deed and the surrounding legislation and caselaw.
In a defined contribution arrangement, it all belongs to the pensioner.
In a defined benefit arrangement, the funds are there to meet the promises made to employees by the employer. If the current value of the funds is less than the current expected amount of liabilities, the employer needs a plan to top up and eliminate the deficit over time. Even if the second number is highly uncertain. It may turn out that the assumptions are incorrect and the deficit is eliminated as facts change. Or it may turn out that the deficit goes up for the same reason and more funding is required.
In the case of a surplus, the trust deed is the starting point. The deed may allow the trustees to increase pensioner benefits or reduce pension age. It may allow the trustees to make a payment back to the employer. There may be an ultimate gift over to charity. in many cases will be tax consequences.
And it may be possible to amend the deed (either under its own terms or by going to court) to allow either if they are not already permitted. As I understand it, the proposed change of law is about this power to amend the trust deed to deal with surpluses. The trustees are going to be given a “statutory override” to do that, without a need to go to court to approve the change. Subject of course to their fiduciary duties.
It seems to me that the trustees ought to be very cautious in paying anything out to the employer. Perhaps they should only pay out a small proportion each year – say 10% per year over 10 years, adjusting each year – so we can see how things actually work out in practice. The position will look very different by the time we get to year ten. We know that a surplus can quickly become a deficit and vice versa.
You are right.
The trolls are those bwho come here claiming certainty.
The only thing certain about them is that they are fools.
I am entirely justified in pointing this out.
“In a defined benefit arrangement, the funds are there to meet the promises made to employees by the employer”
Are the promises not made by the pension fund trustees?
They are bare by the employer
It us the trustee’s job to make sure they are fulfilled
EDITOR NOTE: I AM POSTING THIS COMMENT DESPITE IT BEIG DEEPLY MISLEADING, REPETITIVE AND JUST WRONG. SEE MY COMMENT THAT FOLLOWS FOR EXPLANATION.
Pointing out the errors you have made is not trolling. It is clear you have very little real world knowledge of how DB pension funds are managed.
I’d go as far as to say that feeding incorrect and false information to your readers would be the trolling.
As to your claims:
1. Yes, scheme liabilities can be fairly accurately determined if you know the membership of the scheme, which by definition you do in a closed fund. That is not to say the value of those liabilities don’t change, but this change is predictable given moves in interest rates. Which means those moves can be hedged and risk managed.
Most schemes will target a funding level and their portfolio will be managed to achieve or maintain that. In practice, funding levels of schemes which are at or around fully funded will deviate only very small amounts, of order 0.2% from that level. Even during the LDI “crisis” funding levels barely moved for most schemes, and indeed most actually improved.
You seem to think that risk management is impossible for some reason.
2. Pensioners do not own the assets in the scheme. As the name implies, they own a defined benefit claim on the scheme.
One of your main claims that any surpluses in the scheme are owned by the pensioners. This is simply not true, certainly not legally. The whole scheme is owned by the sponsor in a ring fenced entity, with the offsetting liability being the legal requirement to make those defined benefit payments.
Your argument, apart from not understanding the legal framework also seems to confuse DB and DC pensions. In DB, pensioners bear no investment risk, whereas in DC they do. Yet you are arguing that DB pensioners should have the benefit but no downside of investment risk.
This would lead to several consequences. Firstly, the company sponsoring a scheme would inevitably contribute less to any scheme if any over-contribution or investment outperformance would be lost to it. It would also encourage schemes to take far more risk, given pensioners are among the trustees typically, as they could benefit from any investment gains but would be floored at 100% of defined benefits in the case of any losses, which the sponsor would have to pick up. This is not sensible and certainly not equitable.
Moreover, schemes sponsors can already extract any surplus from their pension funds, but the mechanism for doing so is through reinsurance – or going to buyout. This means that the whole scheme moves to an insurer who takes on responsibility for all the pensions and also takes the assets. This is typically fairly expensive, requiring a funding level of around 107% but most DB scheme sponsors will aim for this to remove the liability of their legacy DB funds from their balance sheet. So a DB scheme with funding level of 115% would go to buyout and the sponsor would receive 8% back.
This is typically a very slow and inflexible process, and is quite costly for the scheme sponsor itself. The assets transferred are also then owned by the insurer, which are typically very large by assets under management and are not tied to the same investment objectives as a DB fund. What the government is trying to do is partly to make management of overfunded schemes more flexible and less costly to the sponsor, but also align with the government’s investment objectives more. DB schemes will typically be more invested in the UK (both government bonds and UK equities, PE and infrastructure) than an international reinsurer, so on buyout some of the invested assets are “lost” to the UK and are invested elsewhere. It obviously suits the governments growth and funding objectives to keep as much invested here as possible.
3. You don’t do yourself any favours when claiming you are right when a quick google search would show you are wrong. You don’t have any experience of how DB pensions are managed and are wrong about the laws surrounding it, and instead started to vent and make stuff up about fiduciary duty – which also means something different to what you claim in this context.
Regarding your other (somewhat repeated) points:
Firstly: The sponsor owns the assets in the scheme and own any surplus. This is not even up for debate. The government legislation (though not clearly defined as to what exactly the changes will be yet) is aimed at increasing flexibility for the sponsors and keeping more assets and investment in the UK on the government side. This may or may not require changes in legislation but certainly won’t require any changes in trust deeds.
Secondly: I think what you say here betrays your lack of understanding. It is not possible to accurately predict the future, but asset consultants and pension fund managers are not trying to do that.
What they can do is measure the value and risk of given assets and liabilities at a given time and then put structures in place to hedge out most of the risk of those liabilities. Which means that they can manage the risk to the funding level of a scheme with a good degree of confidence – quarterly variations of order 0.2% are typical.
You also talk about mortality as an example. without truly understanding it. Whilst no-one can predict exactly when an individual will die, over a large population (such as the members of a pension scheme) things will tend to the mean. We even have pretty good information about trends in mortality, which move very slowly. Schemes can and do account for this. Of course, the biggest mortality “risk” to a scheme is a sudden event which changes the lifespan of members. In all likelihood this would be something like a pandemic, and reducing lifespans tends to help the funding level of a scheme, so this risks are heavily skewed.
You also don’t seem to understand the difference between risk and uncertainty. Risk is market risk. The value of an asset or liability changing given a change in market prices. Uncertainty is everything else. Both can be calculated. Risk exactly, uncertainty within a set of parameters and confidence levels. Both can hedged.
There is very little uncertainty in a set of fixed, defined benefit cash flows, and the risk can be hedged pretty accurately.
Thirdly: So if you don’t want to match your assets to your liabilities what are you suggesting? Not matching your investments to your liabilities would be a failure of fiduciary responsibility….
Fourth: Trustees have a fiduciary duty to both the scheme members and the scheme sponsor. You don’t seem to understand or acknowledge this.
Otherwise you would have situations where the scheme could essentially gamble to make huge returns for the pensioners and if it went wrong place all the losses with the sponsor who guarantees the 100% pension level.
Nor did you claim that surpluses should be retained for reasons of safety (even though most schemes will aim for 107% funding, so by default already build a large safety margin in to their strategy). What you said is that surpluses should accrue to the pensioners.
That so few DB schemes have failed in total, and especially in the last 25 or so years is testament to the work that actuaries, consultants, trustees, investment managers and even government have put in. Your claim that these people are ignoring this duty is not only quite false, I’d say it is slanderous and libelous. Certainly none should take any advice from you, a man with no experience in the field.
If you are happy with your responses, even though they are factually wrong and display your lack of knowledge of the DB pension world, but are still happy to write nonsense and present it as truth, I think it says a lot more about you than anything else.
I cannot be bothered to reply in detail to another crass comment from someone who thinks he lives in a certain world, and who has not the slightest apparent comprehension of the fact that my whole point is that it is not. Like economists the world over, actuaries can make assumptions detached from reality that they claim reveal the truth, and my answer to them all is quite simply: by ignoring uncertainty their models are not worth the pixels they are reported with.
So let me just highlight some of the absurdities in this post and then I will close this thread:
“ 1. Yes, scheme liabilities can be fairly accurately determined if you know the membership of the scheme, which by definition you do in a closed fund.”
No you can’t. In three generations the nature of the diseases that kill in this country and life expectancy have changed radically. There is no way on earth that anyone knows that this will not happen again. GLP-1 drugs might extend life by 15 years. I doubt it, but it might. Cancer treatments might do the same. There is no one who knows otherwise. The evidence is very strongly that change in this area is likely. Only a fool could write the above claim.
“ 2. Pensioners do not own the assets in the scheme. As the name implies, they own a defined benefit claim on the scheme.
One of your main claims that any surpluses in the scheme are owned by the pensioners. This is simply not true, certainly not legally. The whole scheme is owned by the sponsor in a ring fenced entity, with the offsetting liability being the legal requirement to make those defined benefit payments.”
It is staggeringly worrying that someone who claims they understands pensions thinks this. Pension funds are legal entities very decidedly separate from their hosting entities. That is to protect them from host entity failure. Anyone who can write the quoted narrative is profoundly wrong. It is the trustees who own the fund and they have the duty tom manage it for the benefit of the members. The default setting in doubt will be that the beneficiaries should benefit from the fund. The trust deed may suggest other routes. But the claim made is just wrong.
“You also don’t seem to understand the difference between risk and uncertainty. Risk is market risk. The value of an asset or liability changing given a change in market prices. Uncertainty is everything else. Both can be calculated. Risk exactly, uncertainty within a set of parameters and confidence levels. Both can hedged.”
This is crass. It shows a fundamental lack of statistical knowledge that is quite frightening. This claim is akin to using Newtonian knowledge of physics in a quantum world. It really is that wrong.
“Fourth: Trustees have a fiduciary duty to both the scheme members and the scheme sponsor. You don’t seem to understand or acknowledge this.
Otherwise you would have situations where the scheme could essentially gamble to make huge returns for the pensioners and if it went wrong place all the losses with the sponsor who guarantees the 100% pension level.”
Wow! Where did that come from? As gross misstatements of understanding of fiduciary duty go, that is right up there.
I could ague with plenty more, but frankly this commentator is so wildly wrong I will not set my time.
And these people have the nerve to say I do not know what I am talking about.
I am saying one thing: there is uncertainty. I am also suggesting there is some law to comply with. Apparently those commenting are unaware of both. That’s very scary. I hope there are some decent actuaries in the world. 8.8 million people are in these schemes.
Good Lord.
As busy as I am at the moment, I read Mohammed’s post and I he states this:
‘Your argument, apart from not understanding the legal framework also seems to confuse DB and DC pensions. In DB, pensioners bear no investment risk, whereas in DC they do. Yet you are arguing that DB pensioners should have the benefit but no downside of investment risk.’
As far as I am concerned, pensions are a form of saving and savings need to be protected. To have a risk present in them – the risk of them being wiped out – is unacceptable.
Mohammed – whether he intends it or not – has to me at least justified why pensions should be a state concern and not the concern of markets. If the state can be the guarantor of risk taking for private banking with a huge CBRA, then it should be able to take on the pension liabilities of the citizens in this democracy as seriously.
Thank you Mohammed for clarifying how unfit for purpose the current system is with your post.
Much to agree with
I think you are just highlighting your lack of understanding and knowledge here. Likewise in your latest post on pensions today, which I will comment on separately.
I also notice that you avoided most of the points I made as I am guessing you really have no answer to it.
1. Three generations? Sure, mortality rates will change a lot over that kind of time scale.
They will NOT change dramatically year on year though, which means hedges can be adjusted for changes in the actuarial evaluation well before they become an issue. And indeed they are in practice.
Only a fool would claim you can’t hedge out any mortality risk.
2. Pension funds are usually not totally separate from their sponsoring entity. Nor can they be. In a bankruptcy of the sponsor they may have a clam on the assets of the sponsor, and likewise if the scheme is overfunded the sponsor might have a claim on the scheme. They are ring fenced but will often appear on company accounts, another indicator that they are not wholly separate from the sponsor.
Likewise you are wrong in saying that the trustees own the fund.
The default setting is that beneficiaries should benefit from the fund to exactly the amount of their defined benefit. No more or less.
3. You don’t understand the basic meaning of the terminology of risk and uncertainty when used in the financial context.
Risk is simply a measure of how much the value of an asset will change given a move in the markets. How much a bond’s price will change for a given move in interest rates for example. It makes no assumptions or expectations of future prices or outcomes. I don’t need to know what the future will look like to know how much my equity holdings will make or lose if equities move 1%.
Uncertainty is unknown part. We don’t know where asset prices will go so we use statistical methods to assign probabilities to different outcomes.
VaR which you mention is a measure of uncertainty, expressed in risk terms.
You can easily hedge most risk, to very high levels of accuracy. Liabilities (which are priced off bond curves) and be hedged with bonds etc. By doing so, you can remove a lot of the uncertainty from a pension scheme. If you have hedged your interest rate and inflation risk, you are ambivalent to which direction the market goes.
This means that you are left with one main source of uncertainty. Those the fund chooses to have through it’s investment choices in risk seeking, non-hedging or strategic assets.
As a very good example, during the LDI crisis most DB schemes actually had their funding levels increase. It was a risk event in the Gilt market and highly disruptive, but for the schemes which were hedged (all of them) it was only a liquidity event – serious but only in so far as it meant that Gilts had to be sold to maintain sufficient collateral buffers.
4. I made an example. In this case if the trustees only had a fiduciary duty to pensioners (which is what you claim) and have a guarantee of 100% of defined benefits but no cap, they would be incentivized by those pensioners to take undue risks to maximise the potential value of hat fund.
Regardless, you are wrong in both your understanding of fiduciary duty and that it does not apply to the sponsor as well. It does.
“And these people have the nerve to say I do not know what I am talking about.”
You don’t. You’ve proved that multiple times. You have no experience of the pensions industry or indeed finance of any sort and yet have the temerity to lecture other people who do. Then when you inevitably get it massively wrong act like a child and just claim you are always right, along with denigrating the skilled and conscientious people who work in the industry.
I’m not sure if it arrogance or stupidity. Probably both.
READER WARNING:
The above claims are so wildly inaccurate that they reveal Mohamed to literally know nothing about what he writes.
For example, in the case of a host company insolvency there is NEVER a claim on pension fund assets. They are legally separate. The fund legally belong to the trustees. And the appear in company accounts to reflect funding obligations, but that is it. Inclusion does not reflect either ownership or control. And yes, I do know: I was a chartered accountant for 42 years.
This man is a dangerous fool. He will not be appearing here again.
A side issue – It always seemed to me a miracle of the English language – the change from ‘defined benefit’ to ‘defined contribution’ pensions .
‘Defined’ was used to assure us that s they were both ‘defined’ , so they were both sort of ‘definite’.
In any other purchase – the switch from – ‘you know what your are getting for you money ‘ , to ‘it will cost you this – but we cant say what you will be getting’ – would be an immediate ‘no thanks’.
But no – the transition to the scam which is ‘defined contributions’ was easy
Agreed
The pensioner gets lumped with the defined risk but receives none of the surplus rewards associated with that risk. Sounds like a scam.
Shades of the surpluses in the early 1990s, followed by Gordon Brown’s stealth tax that removed dividend credits in his first budget in 1997. That led to declining equity investment by defined benefit pension funds.
Actuaries compare the discounted value of future cash flows with current market values. Nothing more, nothing less. At present, discount rates are on the high side thanks to the Bank of England’s high interest rate policy. A high discount rate minimises liabilities. Meanwhile equity markets are in cloud-cuckoo land, thanks to credit expansion in the pandemic and Joe Biden’s “Inflation Reduction” Act. So the actuarial comparison that leads to “surpluses” is vulnerable on both sides.
The idea that actuaries take a long-term view of risk is not quite right. They lay off their own risk in their simplistic comparison by relying on accountants to value assets and liabilities. Do accounting standards help? I doubt it. When I was a partner in a former UK investment management firm, accountants produced a standard that turned an asset – part of the partnership capital – into a liability on the grounds that there was an obligation to repay capital if a partner retired.
Everyone involved in this game gets a cushy number and evades responsibility. Pensioners come last. Government mandating equity investment by pensioners will be a future scandal. As for pension surpluses, they will disappear again, leaving pensioners out of pocket.
In fairness, the availability of plentiful govermment bonds on which rates can be locked in does help these calculations – but there are plentiful other problems that create considerable uncertainty. Life expectancy is not known, for example (whatever they like to claim).
Life expectancy can be hedged, so this is not a problem either.
Now I have heard it all….
Politely, of course it can be, by retaining surpluses.
Now stop pretending that your maths makes you masters of the universe. We do not believe you.
And I have the answer, and you have not.
D J Kauders,
You are mixing up a lot of different issues and hence coming to a false conclusion:
1. Closed DB schemes do not invest in equities to any meaningful extent, particularly now they are in surplus. They primarily invest in bonds so a) are not exposed to equity market volatility and b) are not exposed to changes in interest rates.
2. Accountants do not value liabilities, actuaries do. And assets have a value assigned to them by the market (the vast majority of a pension scheme’s assets are publicly traded, so there is a published price). Accountants are not needed.
3. Government plans is NOT to invest assets backing DB scheme liabilities into equities, it is for DC schemes (and potentially surplus DB assets).
Oh dear…
1) Maybe you have not heard this, but gilts vary in price. There is even default risk.
2) Markets know. Wow. Are you really daft enough to believe that?
Your claims are those that were made prior to the 2008 global financial crisis, and all of them were wrong. Read Adair Turner’s report on the issue. You might learn something.
If we are going to discuss pension fund investments, then it is worth mentioning that (I suspect (but I do not have sufficient information to say with certainty), that a substantial proportion of corporate pension funds nowadays are in LDIs. I can think of one case where it is over 30% of the fund. My case for a general principle of keeping all surpluses in the fund seems to me to be basic , necessary prudence*. To the actuaries – please discuss, by all means.
“Everybody remembers the Truss Budget, but nobody chooses the calamitous BoE botched LDI crisis. There is no good reason for the mass amnesia.
Agreed
You are just proving you don’t understand with this comment:
1. Liabilities are valued off the gilt curve. Which means you can hedge them with gilts. Therefore you are ambivalent to the price of gilts going forward in a fully hedged portfolio.
2. Yes, markets know the value of an asset today. This is what the actuaries will use to value the liabilities and the assets. There are no assumptions made about the future values of assets in an actuarial valuation of a fund.
But do tell, how would you value or manage the risks in a DB pension scheme?
Mohamed
Your self confidence is utterly misplaced.
I am quite sure you have not read a word I said this morning.
I doubt you would understand it if you had.
And please stop being rude to comemntators who have wisdom greater than it seems you might ever find.
Richard
Richard, I think you will recall from our past correspondence that I worked in the pensions world in the 1980s and 1990s in various capacities – as a fund manager, a scheme trustee and a pensioneer trustee.
My experience of actuaries was that they were serious, sensible men (yes, all the ones I knew were men) and I could not imagine them making these remarks. Perhaps we now have a breed of younger people with different views.
When defined benefits or final salary schemes developed surpluses because of better investment yields, there could be a contribution holiday for the company and occasionally a reduction in the amount deducted from the employees’ salary.
Another relevant point in the employees’ pension contract document was this:
“Benefits are paid at the discretion of the Trustees.”
“Everybody remembers the Truss Budget, but nobody chooses the calamitous BoE botched LDI crisis. “
Plenty of people remember it, much less understand it.
It was not LDI that was the issue it was leverage and lack of collateral. And leverage has gone down significantly and collateral has gone up since then.
But I shouldn’t spoil a good story for those who aren’t involved in the business.
🙂
Weird how everyone but the trolls here, from the FT to the Bank of England, think LDI created the crisis, because it did.
Weird how you’re so confident you won’t use a real name.
bankunderground.co.uk is a Blog written by BoE staff. ‘What caused the LDI crisis?’ was written by BoE Staff members, Gabor Pinter, Emil Siriwardane and Danny Walker. They do not of course criticise the BoE, but since they argue for specific changes to the LDI regulations, I leave you to work out why the changes were needed.
Policy Implications:
“In the aftermath of the [LDI] crisis, there has been a large debate about how LDIs should be regulated going forward, and the Financial Policy Committee has recommended that the Pensions Regulator takes action in the UK. One set of proposals involves liquidity and leverage restrictions for LDIs. However, our results imply that excessive LDI leverage was likely not the core issue driving the fire sale, as LDI debt was relatively small compared to pension assets. Instead, our analysis points to segmentation between LDI and pension balance sheets as a key driver of the crisis. Regulation designed to improve operational arrangements between pensions and LDIs, such that their balance sheets are better integrated, may therefore be most effective at avoiding crises of this kind. Of course wide-scale operational changes will take some time to implement, which means other measures are helpful in the shorter term” (bankundergound, 26th July, 2024).
I suggest you also read the IMF Paper, ‘Putting Out the NBFIRE: Lessons from the UK’s Liability-Driven Investment (LDI) Crisis’; 29th September, 2023. In its Summary, the IMF writers say this: “This paper seeks a deeper understanding of the factors that amplified the gilt market turmoil which ultimately led the Bank of England (BoE) to undertake temporary gilt purchases on financial stability grounds in late September/early October 2022 to restore orderly market conditions and enable LDI funds to build their capital positions. With the gilt market stress and the BoE’s purchases now fully unwound, this paper identifies the key reasons for the success of the BoE’s intervention. Then, drawing also on findings of the 2022 UK Financial Sector Assessment Program (FSAP), the paper discusses key gaps and policy issues related to the monitoring of financial stability risks in the broader NBFI sector for both individual jurisdictions and international standard-setting bodies”.
Fires, key gaps, policy issues? No, nothing to see here.
Then there is Sarah Breeden’s speech on 7th November, 2022 ‘Risks from leverage: how did a small corner of the pensions industry threaten financial stability?’ Breeden reported the BoE made a£19.3Bn internvention over 13 days, for ‘financial stablity’ reasons. In her assessment, Breeden says this: “Let me be clear. The onus for building resilience in the non-bank system sits first and foremost with the firms themselves”. So, nothing to see here.
Breeden in 2022 thought: “Let me be clear. The root cause is simple – and indeed is one we have seen in other contexts too – poorly managed leverage” (p.2). But compare Breeden, 2022 and Bank Underground, 2024: “LDI leverage was likely not the core issue driving the fire sale”. So, nothing to see here. Again.
Clearly in this world of inconsistent uncertainty that nobody notices, Nelly the elephant isn’t a pseudonym.
Disclaimer:
I trust no elephants have been adversely affected by the references to amnesia in the publication of this comment.
Thanks John
Or to put it another way, those ‘clever people’ who thought they knew how to hedge did not do so, after all.
They created massive uncertainty as a result.
Their models did not work.
I am staggered 🙂
Yes, and for some inexplicable reason our august Pensions Authority, Nelly the elephant seems to have gone to ground, and for some reason is now hiding discreetly from us, in a corner of the room.
I may be missing something here, and I am no expert, but I am a pensioner of a closed DB scheme, and viewing many of the comments there seems to be an assumption that all the liabilities are known. In my scheme partners of members are eligible for half the schemes member’s pension if the scheme member dies first. I belive there are rules as to elderly members marrying partners decades younger than themselves, but I am pretty confident my scheme does not have detailed partner information, so to claim the liabilities can be accurately calculated seems to me to be a false assumption.
Looking at the death lists we receive occasionally, there are many wives dying many years after their husbands who have received a reduced pension over that time.
Agreed
And one of the many areas of uncertainty
See more on this today
I didn’t know that actuaries actually interacted with people – I have never been able to get them on the phone when I call with a Q to my insurance company.
[…] video was actually recorded about three or four days ago, before the furore about pensions that has erupted here over the last couple of days broke out. It does, however, highlight a key […]
[…] There has been discussion on pension fund management here over the last day or two. […]
“My suggestion would be the pension lifeboat should get the sum.”
Why should the pension lifeboat get the surplus, when they have done nothing to deserve it? You can argue how it should be split between sponsor and pensioner, but why on earth should it be given to a third party?
What is the rationale?
Do you have any idea of the fact that we live in an integrated world and that this creates mutuality of responsibility?
What is the rationale?
Well, I speculate it might be that it is a lifeboat for pensioners? When, exactly did lifeboats become a bad idea Do RNLI volunteers check whether people in distress deserve to be saved before they launch…..?
The PPF (lifeboat) raises funds by charging a compulsory levy to the eligible pension schemes it protects, by receiving the assets from pension schemes that transfer to the PPF from an insolvent employer, and by recovering assets directly from insolvent employers.
It seems to me the PPF at least has a case for receiving surpluses, in certain cases. Whether it has as good a case as pensioners is for debate, but perhaps as good a case, or better than employers.
Thanks