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03

Soapbox: United we stand, divided we fall

Open-access content Wednesday 6th March 2013 — updated 5.13pm, Wednesday 29th April 2020

Hugh Creasy looks to a future where all the stakeholders involved in corporate pension schemes join forces to surmount their funding challenges

2

As alternative rock musician and activist Billy Bragg put it, 'There is Power in a Union'. Perhaps that, albeit without the capital U, was what was going through the minds at the Department for Work and Pensions (DWP) as they assembled the current consultation on smoothing discount rates for funding corporate pension schemes.

Certainly, the way the consultation has been constructed as a series of questions encourages active participation across not just the technicians but also the wider groups who feel the force of funding rules. We may already be comfortable with the technical arguments, but the open-ended nature of the questions will be refreshing.

It is easy to be glib about the effects of low gilt yields on funding needs. Low gilt yields have unquestionably increased deficits. However, with base rates so low and projected to remain low, the financing cost of those deficits has barely risen. Cash funding requirements for 2012 valuations are regularly unchanged from existing levels. If sponsors are not being asked to pay more than had been budgeted in the heady days of 2009, what's the fuss? The consultation has been designed to tease out sponsors' experience to answer that question. However, as actuaries, our primary role is not to re-examine last year's valuations. Instead, it is about guiding for the future.

Our professional role gives us an obligation to help pension scheme sponsors and trustees appreciate the risks they are taking and so help give them stable direction in the medium to long term. Yes, we should be willing to give positive advice and, on principle, we should not criticise those who recommended moving out of gilts in January 2010 saying "we believe that it is likely that gilt yields will rise over the next three years". A valuable consultant must have the courage of his convictions to speak up. What that message must come with though is an explanation of the consequences for the client of taking such a step and getting the call wrong.

I said we should not focus on the past, but it can be illuminating. The obvious example is price inflation where, over the years, index-linked gilts have been perceived as more and more expensive. Sponsors and trustees who have steered clear of inflation protection will rue the day if a dose of inflation does transpire to be the chancellor's- and the new governor of the Bank of England's - mysterious Plan B. Handling the effects of low gilt yields during 2012 will be a walk in the park by comparison.

That is a key message that actuaries should be communicating to their clients. It may also be a more relevant, if more challenging, question for respondents to consider when they go back to the DWP.

So why am I so upbeat about the DWP's consultation, which, after all, focuses squarely on the history of 2011/12? I have high hopes that we are turning a corner in collaborative working. Although we must remain mindful of conflicts of interest, I am looking to a future where the stakeholders - corporate sponsor, trustees, regulator, all advisers - actively contribute to the debate and jointly help to deliver a way forward.

We have come a long way with investment de-risking products and techniques as well as creeping opportunities for mortality hedging, but we will achieve so much more, so much faster, if we can work collaboratively.

The past few years have brought little but fear for many corporate pension scheme sponsors - and fear breeds poor decision-making. This may be benign, with unnecessary expense incurred on elaborate funding solutions. More darkly, it may be detrimental to pension scheme members and/or those who depend on the continuing health of the sponsor.

The obvious way to reduce the level of fear is to open up the issues in a non-confrontational way. The new requirements for actuaries to manage potential conflicts of interest will need sensitive handling. Done well, we can bring a new face to the table, inspiring healthy debate and jointly creating new ideas.

The DWP's approach feels to me like the first step down the path as we support each other in helping our clients through such a difficult period. Billy was right: 'it all amounts to nothing if together we don't stand'.


Hugh Creasy is an actuary and director of Xafinity Corporate Solutions

This article appeared in our March 2013 issue of The Actuary.
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