In an interview with GP's sister title Professional Pensions, Daily Mail & General Trust pensions director Geoffrey Staines talks to Jonathan Stapleton about communications, risk management and in-scheme resource.
JONATHAN STAPLETON: What do you believe are the biggest issues facing pensions schemes at the moment?
GEOFFREY STAINES: Well, there are two main ones. The first is the problem of the risk created by the defined benefit pension liability to the balance sheet of the sponsoring companies – both the liability itself and the volatility of that liability. I think that’s a serious problem occupying a lot of time, certainly my time. The second issue is a more recent one, and that is the impact of the recent tax changes and how management attitudes will change in reaction to that.
JONATHAN STAPLETON: In your view, what steps do you think the coalition government should take with regard to occupational pensions? They have made several announcements so far. Have they started out on the right track?
GEOFFREY STAINES: Yes, I think they have. The previous government made some quite difficult decisions and it looks as if the coalition are willing to look again at those and might consult again with the industry. The problem is, of course, that nothing is going to be tremendously palatable because there are some economic difficulties that have to be addressed and that will affect pensions whichever way it is cut. But there are better ways of doing things, and early indications are that we might take a slightly better route than was envisaged.
JONATHAN STAPLETON: You talk about the economic difficulties and how these have led many employers to close or restrict their defined benefit schemes. Do you think believe final salary DB schemes have effectively run their course and, if so, what do you think employers can do to replace them? What sorts of things should employers be looking at?
GEOFFREY STAINES: Old DB has run its course. It has really been run off the road by government activity, legislation regulations, etc, which have just racked up the cost. But it’s a good model, as the future generations will testify when they look enviously at it. So the solution is probably not the one that’s being taken, which is just to move herd-like towards DC and hope that that’s going to deliver a decent pension. The arithmetic tells you that this won’t happen and if the changes in a couple of years’ time lower the bar for acceptable quality levels in DC plans, then we are in an even worse state.
However, imagine if you could come up with something that had some of the attributes of DB – including the predictability that is welcome to people who don’t really understand pensions. If you could do it in a way that sponsors are more comfortable with it – something like a defined contribution plan with a defined benefit underpin – then there is some measure of predictability but there’s less exposure to the deal by the sponsor.
JONATHAN STAPLETON: Some sort of shared risk scheme?
GEOFFREY STAINES: Yes, shared risk is the way forward, I think. It is just a shame that we’re going to pull an awful lot of companies back, or try to, from what will be a pretty low, almost third-world, level of pension provision. I think that’s where we are headed if we’re not careful.
JONATHAN STAPLETON: If we could talk a little bit about the DMGT schemes. I know you’ve done a lot of work with regards to communicating your scheme to employees. How can companies really get the message about the pension scheme over to staff?
GEOFFREY STAINES: , I think pension schemes have done a good job with communications. In some cases that I’m familiar with, I think the company does a better job on communicating pension schemes and retirement benefits generally than they do on almost any other aspect of corporate life. But, although that’s been laudable and creditable to the industry, I think that’s missing the point.
The point seems to be that the poor individual trying to understand pensions cannot just understand the pension scheme in a vacuum. Rather, they need to understand how retirement savings fits in with all these other savings options that exist, such as ISAs. And they hear about AVCs, they hear about share save schemes that are offered by their company, and they just don’t understand, most of them, how to weigh them up, and how they fit together.
So the key is, I think, putting pensions in the context of financial planning generally and letting people know it’s only another form of savings.
JONATHAN STAPLETON: Returning to the issue of the pension risks faced by corporate sponsors, talk us through how those risks can be managed and the different methods of managing them – perhaps reflecting on your own experience.
GEOFFREY STAINES: De-risking is a big issue, particularly for us. I think you’ll see in time that just as we are now seeing internal heads of investment coming in to help with some of the asset allocation and other investment issues in-house, a head of risk will become a not unusual appointment and a focus on risk. Perhaps my job title will be seen as a legacy, but de-risking is quite important.
We have taken a slightly different view... well, some might say a very different view. We have not gone down the consultant led route. We have decided, as far as possible, to interface direct with the players in the de-risking market – that’s the investment banks and the insurance companies and other specialists – and try to learn exactly what is on offer. We then choose the experts depending on where we’ve got with that dialogue and that leads to a lower cost and a much more focused option.
So far it has led to inactivity as far as too much de-risking is concerned, because we haven’t seen a great deal of value out there when you get right down to it. Some of the deals that have been done are clearly motivated by other corporate agendas, which is not a problem. We don’t have that at the moment, so we can look at it in isolation, and you have to be careful to really properly assess the value of a de-risking strategy.
We’ve got the tools to do that and some new software that we’re using from a specialist company with whom we closely liased in its development. We believe it is important to have the right people to work on de-risking and the right tools to do the job properly. That is something we’re spending a lot of time on. It occupies much of my time currently.
JONATHAN STAPLETON: You feel that doing that on your own bat with enhanced in-house expertise is beneficial for your scheme?
GEOFFREY STAINES: Yes, I think it’s fortunate for us, because we brought in a head of investment to work on the asset side of de-risking among other things. That was going to happen anyway, but fortunately we do already have the resource in-house that is appropriate.
You have got to understand – these are big ticket transactions. You’ve really got to understand what you’re doing. I’m sure good investment committees don’t allocate assets to asset classes they don’t understand. De‑risking is no different from that. You can’t do a transaction with a very sophisticated third party and not understand what’s going on.
You can rely to an extent on consultants, but it is not our style to take that too far. We like to try to understand what’s going on ourselves. And that’s working well. The consultants that we are using and the specialists seem to be okay with that approach. So we haven’t lost anything that I think is important in that dialogue.
JONATHAN STAPLETON: Looking back to the Budget – has it generally been positive? Do you think a reduction in the annual allowance, as mooted, will be a positive move for pension schemes?
GEOFFREY STAINES: I do. I think it’s always got to be a better way to be able to stay in the room but be limited to where you can go in the room rather than not be allowed in the room at all, which was the idea of the previous government. It was a lock-out of high earners from further registered pension accrual.
Okay, that addressed what the government sees as a skewed tax relief situation, which is fine, but the bit that appeared to be totally overlooked and perhaps might have been something that has led to this review that you’ve just mentioned is the fact that pension provision for the workforce is influenced by the attitudes of the decision makers at the top of a company, and if they’re disenfranchised from pensions, they will take a view on pensions that isn’t particularly positive potentially for the rest of the workforce, which surely the government can’t be in favour of.
So I do think the change is positive. I hope it’s for that reason. We don’t know enough to get too excited about it, but clearly there is going to be quite a restriction on pension provision in registered schemes for high earners, but let’s see how that pans out. There are a lot of unknowns, but this is a better way I think.
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