weegie01 wrote: Thu Oct 13, 2022 12:34 pm
Torquemada 1420 wrote: Thu Oct 13, 2022 11:51 am**Because scheme actuaries and trustees are f**kwits and by being so, have considerably worsened the deficit issue.
It has been years since I was involved in pensions, but one thing I do recall is actuaries ranting about the short termism of trustees and firms.
Their case was that their models worked over decades. There would be the fat and the lean over those timescales, but they would balance out. But when the economy was strong , when markets were booming and funds were notionally hugely over funded, firms stopped making contributions and profits were boosted. One bank I worked for made no contributions to its DB fund for over a decade. So when the lean came, the funds were screwed.
In the instance I mention, in the good years the actuaries were told to go away and rework their models as their forecast of what would happen in the economy, and the volatility of fund values that would result, were far too pessimistic. On these new more optimistic forecasts, the reduced funding was justified. In the end it turned out the actuaries had actually been a bit optimistic.
Firms and trustees were equally culpable in this. Firms for diverting contributions to boost profits, trustees for letting them Actuaries I knew had to take some of the blame as they were not staunch enough in defending their models.
That is going wayyyyyyy back? I.E. when the likes of Vauxhall started to take contribution holidays (when that was still legal) and Maxwell stole the funds from the Mirror Group pension.
All of what you say is true. The death was one by a thousand cuts
- increasing life expectancy
- Barber v GRE
- falling investment returns
- falling interest and gilt rates
- the end to contracting out
- the removal of the dividend tax credit
- bad investments
- failure to properly hedge on overseas investments
- getting ripped off by active fund managers
- Thai bride syndrome
- equality for Civil Partnerships
- changes in methodology for conducting scheme valuations
etc
The actuarial failing I am referring to is easier to explain with a made up set of nos. All schemes use a valuation methodology which is meant to comply with the 17/102 framework. We can ignore that the rules remain lax enough to the extent that with pensions, you could almost make up any picture you like by tweaking the tolerances you are permitted to operate with key parameters. And we will assume the methodology is unchanged.
What trustees decided to do to reduce scheme liabilities was to offer transfers (again, ignore that it's a statutory right after 2 years membership because you can circumvent that by simply offering a sh*t TV). It does not take Einstein to work out that in order for that to work, the transfer needs to represent LESS that the ongoing liability you are trying to dispense with**. Granted, this is a tricky game: you want members to leave but not by giving fair value. Hence we saw all kinds of dodgy inducements offered by schemes and employers, most of which are now banned.
**Instead, schemes have done the opposite. How?
It's all in the nuances of gilt nos(here on, I will make up the nos because it's easier to see). Keep in mind that DB and DC are totally different animals and trying to map one to another is simply hard and inexact anyway.
- What the schemes have been doing is pricing their long term liabilities using long term gilt nos. Let's say that coupon was 5%. And schemes are eternal and so, it kinda makes sense to use the long term gilt pricing if that is your primary building block to meeting liabilities.
- BUT............. wait for it........... post 2008 and QE, we ended up with an anomaly where short term gilt coupons were markedly lower than the long dated ones already held by schemes. Let's say 2.5%. Mr Actuary does a CETV for Lloyds Bank Manager who has a preserved pension of £20kpa and arrives at £20k x (100%/2.5%) = £800k transfer value (because a transfer is a short term liability....). 40 x multiple. Do the maths: even if you invest that in cash at 0% return, in effect you have to live 40 years before your money runs out in your transfer pot. I've ignored inflation. High 30x CETVs has been very much the norm.
- Meantime scheme liabilities are being accounted for at 5% and so anyone in the scheme is having his ongoing £20k pension being valued as a liability at £20k x (100%/5%) = £400k.
The actual margins are not as wide as that and I've simplified or skipped other elements but the salient point remains: in order to try and protect the survival of their schemes, trustees/actuaries have been sanctioning robbing members to subsidise leavers.
This has resulted in an avalanche of transfers. It matters not that f**k all anybody understood why the transfer values were so high: even the thickest financial adviser or the dimmest client could work out that a transfer in excess of 30x a preserved pension looked very tempting. Even more so if you realised it was going to make the likelihood of the scheme go pop.
