There must be many old-timers like me who are dismayed at the headlines regarding deficits in pension funds bringing about collapse of companies and losses of employment.
I am referring to Chris O’Brien’s article in the January/February issue of The Actuary.
There must be many old-timers like me who are dismayed at the headlines regarding deficits in pension funds bringing about collapse of companies and losses of employment. Regulations imposing guarantees of the impossible seem to be the root of the problem, and the disappearance of what was once the best pensions provision in the world, the result.
Admission to membership of a defined benefit scheme involves a term covering several decades, during which all kinds of events and trends affecting assets and liabilities will occur, and guarantees (even of death and taxes) cannot be relied upon. If there is a current appetite for a return to realism in assessing the capacity of pension funds it must be encouraged. One step in that direction is that in the Tata saga. If the press reports I've read have got it right, the finances of the pension fund have been separated from the accounts of the company. That is not the whole Tata story but it has dealt with a major blockage.
A move back to basics must recognise that the primary liability of a pension fund is to pay benefits as a stream of income to beneficiaries, and its asset is the receipt of income as a stream of contributions from employers and employees, and income from investments. So far as possible, this reality should be preserved in the periodic valuations that guide the trustees in measuring the adequacy of the accumulated funds and the current contributions. Market prices of assets are relevant only at the point of purchase or sale, for example when the net cash flow is positive or negative.
To produce figures in a form acceptable to the arithmeticians, discounting is needed only of the future gaps between cashflow out and cashflow in, the merits of different types and grades of assets having been built into the projections of income. The use of differing rates in valuing assets and liabilities is illogical and introduces a distortion.
Victor Hughff
23 February