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Frank Hovis

Defined Benefit Pensions

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They've had it haven't they? 

Headline news today is the Universities one but it's going ot affect them all.  They all pursue outdated "safe" strategies for investments which primarily means investing in bonds that pay at or below the inflation rate so whilst they may not lose money in nominal terms they are so doing every year in real terms.  Their wildly optimistic future assumptions of returns on these investments have masked this inevitable disaster to date but now it's past the point of hiding.

Time for an honest admission:

  • Defined benefits pensions are or should be a thing of the past (not jealously on my part; my current one is just this)
  • Unfunded pensions (army, police) should start being funded now

If these both happen then the vast, and mostly hidden, current deficits will at least slowly reduce as their liabilities diminish with time.

 

That the below, which represents failure by their actuaries, is actually being used as a justification by John Ralfe for rasing student tuition fees yet again is shocking. 

 

And from his own website:

 

Quote

This man is an idiot.

 

UK instantaneous nominal forward curve (gilts)

uknom.gif

May RPI was 3.7%, June 3.5%.  See that money slip slide away.

 

Quote

 

Universities face a new blow to their finances after the main pension fund deficit soared to £17.5bn.

The Universities Superannuation Scheme now has the largest pensions deficit of any UK pension fund after it increased by £9bn last year.

One expert said student fees may have to rise or be diverted from teaching.

But a USS spokesperson said the pensions are "secure, backed by a solid investment portfolio and the strength of sponsoring employers."

The USS funds pensions for academics who are mostly based in the pre-1992 universities, and has more than 390,000 members.

'Less money for teaching'

To ensure the fund remains solvent, the USS will have to submit a plan to the pensions regulator to reduce the size of the deficit, which was first reported in The Financial Times.

That could mean cutting the value of future pay-outs, increasing staff contributions or raising employer contributions, putting pressure on university budgets.

John Ralfe, an independent pensions consultant, said: "It seems inconceivable to me that student fees will not have to be diverted into plugging the pension deficit.


 

 

http://www.bbc.co.uk/news/uk-40763577

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3 hours ago, Frank Hovis said:

They've had it haven't they? 

Headline news today is the Universities one but it's going ot affect them all.  They all pursue outdated "safe" strategies for investments which primarily means investing in bonds that pay at or below the inflation rate so whilst they may not lose money in nominal terms they are so doing every year in real terms.  Their wildly optimistic future assumptions of returns on these investments have masked this inevitable disaster to date but now it's past the point of hiding.

 

 

http://www.bbc.co.uk/news/uk-40763577

A mate severed his time in that industry and predicted this would happen in the early 2000`s he said it all went tits up when standard life ? went tits up due to the dot com bubble bursting the government changed the law concerning how these companies invested the cash  as they  had to invest a certain percentage in gov bonds by law whic were never going to produce the returns that were needed to meet the promises/liabilities  they made /had

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Saw this on the news and the options discussed were raising student fees, current employees paying in more and getting out less etc etc .... only option not mentioned was a reduction in the pensions paid to the current recipients .... it is as if theses people really actually believe that have fully funded their pensions and not the reality which is that all (99%) of pensions are paid for by the next generation. As if 3 or 5% contributions for say 35 years work could ever possibly fund a 20 year index linked final salary scheme.

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1 minute ago, satch said:

Saw this on the news and the options discussed were raising student fees, current employees paying in more and getting out less etc etc .... only option not mentioned was a reduction in the pensions paid to the current recipients .... it is as if theses people really actually believe that have fully funded their pensions and not the reality which is that all (99%) of pensions are paid for by the next generation. As if 3 or 5% contributions for say 35 years work could ever possibly fund a 20 year index linked final salary scheme.

I've bloody paid into this. They take a significant proportion of my salary every month. 

Oh, and the union said not that long ago that it was the most healthy public sector pension going. xDo.OO.o

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Yep, they are doomed. I had a modest DB pension from previous private sector employer, they offered me 35x the annual pension to transfer, couldn't really turn that down.

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1 hour ago, One percent said:

I've bloody paid into this. They take a significant proportion of my salary every month. 

Oh, and the union said not that long ago that it was the most healthy public sector pension going. xDo.OO.o

well i know a teacher and for me to get what she would if she finished today on her current  salary i would have had to put 40-50% of that salary into a private pension to get anywhere near the same and she was moaning about having to mow put 3% in instead off 1.5% IIRC 

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9 hours ago, satch said:

Saw this on the news and the options discussed were raising student fees, current employees paying in more and getting out less etc etc .... only option not mentioned was a reduction in the pensions paid to the current recipients .... it is as if theses people really actually believe that have fully funded their pensions and not the reality which is that all (99%) of pensions are paid for by the next generation. As if 3 or 5% contributions for say 35 years work could ever possibly fund a 20 year index linked final salary scheme.

I heard the same on the radio and immediately thought "what about cutting payouts?" and the print story does include this as an option.

9 hours ago, One percent said:

I've bloody paid into this. They take a significant proportion of my salary every month. 

Oh, and the union said not that long ago that it was the most healthy public sector pension going. xDo.OO.o

The union would have been told this by the actuaries. Who then went "whoops".

10 hours ago, Long time lurking said:

A mate severed his time in that industry and predicted this would happen in the early 2000`s he said it all went tits up when standard life ? went tits up due to the dot com bubble bursting the government changed the law concerning how these companies invested the cash  as they  had to invest a certain percentage in gov bonds by law whic were never going to produce the returns that were needed to meet the promises/liabilities  they made /had

It wasn't the government rule that did it, the problem lies within the ways actuaries are taught.

I was discussing the inverted gilt yield curve down the pub late 90s (aren't I an exciting man!) and wondering who was buying the thirty year when it was yielding significantly less than the ten year even before you bring inflation into account.

Up pipes a life company actuary that he'd bought loads this year because they needed to match their predicted liabilities with pay outs so if he bought these he both demonstrated matching, which reduces volatility as he'd been taught, and also didn't have to pay those investments any attention for thirty years.

That's the mentality of pension funds and that's why these deficits will keep climbing until there is no choice but to cut the payout. They are not seeking return on their investments; they are seeking security and matching and if that means that after inflation they are guaranteed to lose money year after year, well the actuaries will still get paid.

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10 hours ago, Dipsy said:

Yep, they are doomed. I had a modest DB pension from previous private sector employer, they offered me 35x the annual pension to transfer, couldn't really turn that down.

Indeed, fill your boots!

I am buying such, or rather my company mostly is, at 10x when the open market rate is 35x as you note.

This is mental and in the private sector the company would be unable to plug the hole when this inevitably fell over; the public sector however tends to have its begging pleas heard.

The lazy actuarial assumption is that investment returns on gilts and bonds will see a long period where they greatly outstrip inflation and that will solve everything.

I don't think they've been paying attention to the last twenty years of government fiscal policy. 

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To be fair to life/pension actuaries, they are trying to redeuce their risk rather than optimise their returns.

I sort of agree that DB pensions liabilities should be invested in risk free investments. At least for the last 20 years.

What really needs to happen with DB pensions are:

- Removal of spouse benefits. Or at least putting a 5 year max payout limit.

- Capping the inflation limited.

The main problem is these schemes were setup for 15 years  retirement and a ~2% real yield on Gilts. As soon s one of those went, the DB benefits should have been scaled back for everyone.

What the UK is is current retirees and near retirees (60+) are getting the goodies whils tthe cost is being put on he younger.

It would be much fairer to cut all pensions, including those currently vesting.

Public sector is more complex but needs dealing with.

LA ones, and other ones, which are meant to be fully funded. These should have the payout cut or the LA put into liquidation. Just have a couple of smaller LAs put into insolvency and the large LAs/unions will then accept the pension payout cuts.

The rest needs a cap o 20 years pension. If the average payout exceeds that then the pension payouts need  to be slashed.

 

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But there isn't a "last twenty years", you're thinking about individual allocations in defined contribtuion schemes.

In defined benefits you have a vast portfolio that (usually) just keeps building as contributions exceed payments.

So you have an asset allocation that gives you optimum return but with some safety first stuff.  Not bloody everything as in a low interest rate high inflation environment you are guaranteed to lose money every year.

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The USS has gone career average, and has an inflation cap on indexing.

The indexing matches CPI for the first 5%, half of CPI for the next 10%, and no increases beyond a CPI of 15%. So the maximum annual inflationary uplift in benefits is 10%.

They're one hyperinflationairy event from having a massive surplus, and a bunch of very disappointed beneficiaries.

 

 

 

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12 hours ago, Frank Hovis said:

But there isn't a "last twenty years", you're thinking about individual allocations in defined contribtuion schemes.

In defined benefits you have a vast portfolio that (usually) just keeps building as contributions exceed payments.

So you have an asset allocation that gives you optimum return but with some safety first stuff.  Not bloody everything as in a low interest rate high inflation environment you are guaranteed to lose money every year.

In a funded DB scheme, yep.

he problems come when the scheme is not fully funded - BHS. Running on a PAYG with DB benefits - most of the public sector.

 

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19 hours ago, spygirl said:

To be fair to life/pension actuaries, they are trying to redeuce their risk rather than optimise their returns.

I sort of agree that DB pensions liabilities should be invested in risk free investments. At least for the last 20 years.

What really needs to happen with DB pensions are:

- Removal of spouse benefits. Or at least putting a 5 year max payout limit.

- Capping the inflation limited.

The main problem is these schemes were setup for 15 years  retirement and a ~2% real yield on Gilts. As soon s one of those went, the DB benefits should have been scaled back for everyone.

What the UK is is current retirees and near retirees (60+) are getting the goodies whils tthe cost is being put on he younger.

It would be much fairer to cut all pensions, including those currently vesting.

Public sector is more complex but needs dealing with.

LA ones, and other ones, which are meant to be fully funded. These should have the payout cut or the LA put into liquidation. Just have a couple of smaller LAs put into insolvency and the large LAs/unions will then accept the pension payout cuts.

The rest needs a cap o 20 years pension. If the average payout exceeds that then the pension payouts need  to be slashed.

 

Sadly you are addressing this from the wrong angle as far as the 'poor pensioners' are concerned .... try using the word 'entitled' rather than 'fair' and you will soon understand why the young will be enslaved .... those cruises won't pay for themselves!

Edited by satch

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1 minute ago, satch said:

Sadly you are addressing this from the wrong angle as far as the 'poor pensioners' are concerned .... try using the word 'entitled' rather than 'fair' and you will soon understand why the young will be enslaved .... those cruises won't pay for themselves!

If a pensioner is member in a fully funded DB plan then fair do's

What I strongly obejct to is the PPS bailing out unfunded pension scheme with other schemes and tax payers money.

Unfunded pension schemes need to money etxacted from the spondoring compnay. If that company goes bus then all benefits need cutting.

Having current tax payers, with fckall pension benefits bailing out pensioners is disgusting.

 

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