Raj Mody says we need to take a different approach to tackling the crisis in pensions.
It has been another difficult few months for defined benefit pension plans. Against expectations, long-term yields have reached new lows. Pension deficits continue to be volatile, however you measure them.
If we select the pension funding measure that drives ultimate cash financing requirements, the Skyval Index shows recent pension deficits reaching £700bn - a substantial number for sure, but not the £1trn figure suggested by some commentators.
Many pension fund trustees and sponsors will be feeling the acute regret of not having hedged themselves against recent market movements, previously thinking "things can only get better".
Asset strategy in many schemes will suffer from out-of-date fads.
But, for most pension schemes, things got worse, even if an overseas parent looking through the lens of weaker sterling might see improvement in local currency terms.
Either way, there is now a wider acceptance of this new 'lower for longer' environment for yields. Along with life expectancy expectations, this hurts pension plans in a way they never expected.
So what exactly can be done about the so-called pensions crisis?
Start with pensioner liabilities. Why would any company actively decide to gradually turn itself into an annuity provider, unless of course that is its business? Yet, that is what is happening when companies and trustees let their pre-retirement liabilities convert into post-retirement liabilities. Instead, they should look to take these off their balance sheet.
Insurance is an option. Of course, the price needs to be right. Through their sheer scale, insurers can price those pensioner obligations efficiently through access to financial instruments otherwise unavailable directly to most pension plans. New pensions technology now allows schemes to 'slice and dice' their liability profile and find the insurer best placed to take given liabilities on.
There are also plenty of options to reshape and optimise liabilities in the run-up to members' retirement. In this age of freedom and choice, flexible retirement options, pension increase exchanges and the like all have an increasing role to play.
These exercises help redefine the underlying challenge, while enhancing value for members at the same time. The idea of only offering one option at retirement - to swap a quarter of your pension for a lump sum - is outdated.
For the rest of the liabilities, there are opportunities to enhance the construction of asset portfolios backing them. Asset strategy in many schemes will suffer from out-of-date fads. A fresh and independent review, free from any attempt to try to justify previous decisions, is worthwhile to improve the likelihood of meeting the pension commitment efficiently from a cost and risk perspective. It's also an opportunity to reduce fund management expenses.
Finally, it is time to revisit how pension deficits are repaired. Clearly trustees want better funding and more security, sooner rather than later. Plain vanilla financing plans that try to repair deficits in under a decade are fine if affordable by sponsors, but could be more balanced, taking a longer view.
For pension plan which still have long-term liability profiles and otherwise well-managed cash flows, deficit recovery plans could stretch out for ten to 15 years.
Structures such as Reservoir Trusts can also help with improving security, along with more flexible financing, as conditions change. Just as markets are now in a "new normal", we need a new normal for how we fund pension deficits.
None of these methods can necessarily be implemented instantly. But as the pensions challenge is likely to be with us for at least another decade, there is time to act, albeit early movers will gain the most value from their actions.
Raj Mody is a partner and global head of pensions at PwC
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