Hilary Salt asks if it is legitimate for trustees who have a fiduciary duty to members to assume that surplus should only be spent on locking in to lower returns
I'm not a great follower of fashion but my son is often keen to alert me to the latest fad. I was thrilled when he messaged me the other week to tell me I could dig out my old denim jacket from the archives of our overflow wardrobe.
We're quite familiar with the idea of comebacks on planet pensions and I'd suggest that alongside denim jackets we reconsider discretionary pension increases.
We come across quite a few schemes edging into surplus now. It seems to be a foregone conclusion that the only sensible way to use surplus is to de-risk the investments - by buying bonds or eventually by buying out benefits with an insurer.
But some members have large amounts of pre-1997 benefits. When they earned these benefits, they were often told that if scheme finances allowed, their benefits would be increased to try to keep up with inflation, at least in part. And many members would have received those discretionary increases for a fair number of years before they were abandoned as scheme finances struggled with improving longevity, negative equity returns and more recently falling bond yields. So lots of pensioners who had a legitimate expectation of an increasing benefit - an expectation reinforced by their receiving these increases in the past - may not now have received an increase for two decades. It is probably of little comfort to these pensioners to be told that this is because the scheme is de-risking - given that the switch in investments will maximise the risk that those pensioners won't see their benefit expectations being met.
For those schemes in surplus, is it legitimate for trustees who have a fiduciary duty to the members to assume that surplus should only be spent on locking in to lower returns? What happened to the concept of the pension scheme representing deferred pay for the members? If it is their deferred pay, should the pension scheme assets not be spent on them rather than on protecting the employer?
Of course for members, especially those with very weak employers, there is a lot of merit in making the long-term payment of their basic benefits more secure (noting that more security comes from having more money in the scheme, not from reinvesting into bonds). But if the employer covenant is strong, I'd argue trustees should be considering whether awarding some discretionary increases should run alongside a move to "de-risking".
Why are trustees not thinking like this? Well, some are - especially those member-nominated trustees who are close to their members and understand that the primary aim of the pension scheme should be to provide its members with a real income that can give them dignity in retirement. It's one of the great strengths of lay trustees that they aren't infected by the group think of our industry.
But it's worth noting that this is another area where the interests of trustees and the interests of The Pensions Regulator are polarised. The trustees have a duty to act in the best interests of the beneficiaries - that might well mean balancing the need to provide members with benefit security with the desire to meet member benefit expectations in excess of their absolute legal entitlements. But the regulator has no interest in providing benefits above the strict legal entitlement as the payment of any larger benefit increases the risk on the Pension Protection Fund. So trustees awarding discretionary increases rather than following the regulator's preference of only using any extra cash to lock into negative real rates of return can expect to be frowned upon.
Despite that, I'm going to keep trying to make considering discretionary increases fashionable again. And don't worry - the jacket no longer fits so I won't be turning up to trustee meetings in double denim!
Hilary Salt is founder of First Actuarial
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The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.
There have now been a total of 30 longevity swaps over £1bn publicly announced. The full list, provided by Willis Towers Watson and through PP research, is as follows...
The Reckitt Benckiser Pension Fund has secured a £415m buy-in with Scottish Widows, insuring the benefits of around half of pensioners.