As 2016 hurtles towards what seems likely to be a cacophonous conclusion, Pensions News (PN) has felt his concern increasing at the prospect of having to do his least favourite job; wrapping Christmas presents. PN has made the point in at least one previous edition that his present-wrapping skills are unimpressive. PN will go further by saying that he is so poor at wrapping presents that he would not wrap presents at all were it not for the fact that the people he tends to give presents to (particularly the ones he lives with) have made it clear to him that offering a person an unwrapped present is the equivalent of hitting that person over the head with it. The wrapping of a present is (in other words) almost as important as the present itself. PN has read about organisations which will wrap one's presents for a modest fee. Although PN is in favour of such organisations, the problem with them is that they tend to wrap presents well. This means that if PN were to spend money on having presents wrapped and they were well wrapped, the recipients of the presents would detect immediately that he, PN, had not wrapped them. It takes a special kind of talent to wrap a present as badly as PN does and a company which will wrap presents quite as badly has not yet been incorporated in the part of the United Kingdom that PN lives and works in. PN is giving serious consideration of encouraging a couple of the pension schemes where he is an adviser to invest in the sort of start-up company which would take temporary custody of and then wrap his unwrapped presents – in the way that he, PN, would. The company would take the presents, wrap them badly (for a price) and return them. PN would pay, distribute the presents and, presumably, everyone would be happy. There are flaws in this plan. They are that (a) the pension schemes in question may not have the power to invest in a start-up company, (b) if they had that power, the pension schemes may not be advised to invest in the sort of start-up company PN is thinking of and (c) PN is prohibited from doing the sort of “encouraging” he referred to above on the basis that providing “that sort” of encouragement would probably constitute investment advice. This brings us to (d) which is that PN is not authorised to give investment advice.
The subject of investment when it comes to pension scheme monies has never been a straightforward subject. For a long time, trustees and managers of pension schemes have worried about and taken advice in relation to the sort of investment that is most appropriate for “their” pension scheme. Essentially and logically, pension scheme monies should be invested in such a way as to allow the pension scheme members to have a reasonable income in retirement. Where the scheme rules provide that a member should have a pre-defined income in retirement, the job of the trustee is to ensure that scheme funds are invested in such a way as to ensure that that pre-defined pension can be paid. Where there is not enough money in the scheme to pay such pensions, that scheme is in deficit. Invariably, it is the sponsoring employer which is asked to make fund that deficit. So; the job of investing scheme funds is one which calls for, let’s say, active management and there is case law which tells us that passive management simply isn’t good enough. That case law says that (i) trustees must take appropriate advice, (ii) if they are wise, they should invest scheme funds according to the advice they receive and (iii) woe betide any trustee who thinks that leaving scheme monies in a high interest account and then forgetting about it is enough. It would be enough if the trustee had clear advice from an appropriately qualified professional which stated that scheme monies should be deposited in a particular account and left there but investment advice rarely, if ever, says that that is indeed the best thing to do.
The trustees of one particular pension scheme did, once upon a time, leave pension scheme monies in an interest-earning account. The trustees were taken to Court for this. The trustees were able to show that the pension scheme assets were worth more for having been left in the interest-earning account than they would have been had they been invested in certain other funds, stocks and shares. In other words, the trustees’ passive approach had, ultimately, benefitted the pension scheme. The Court was having none of it however; sanctioning the trustees, the Court reminded them that one of their duties had been to invest scheme monies. Leaving those monies to accrue interest in an account without having the written advice to confirm that that was the appropriate thing to do did not come within the meaning of the term “to invest”.
More recently, this week in fact, there was further controversy which is linked to the two paragraphs above. If a pension scheme has assets worth a billion pounds, that’s fine unless the value of that scheme’s liabilities is a gazillion pounds. How pension schemes value liabilities has always been important (therefore) and it has been the subject of the recent controversy. A number of factors are relevant when it comes to valuing pension scheme liabilities however, at the risk of dramatically over-simplifying something which really is complex, a scheme’s main liability is the cost of buying or providing a pension for each of its members. So; if the historical experience of a particular pension scheme is that its members have a tendency to die aged 66, the value of that scheme’s liabilities will be somewhat lower than those of a scheme where (let’s say) members tend to live until the age of 96. Liabilities have (and again this is probably something of an over-generalisation) been valued with reference to Government securities (or gilts) and bonds. This is or at least it has been because such investments are relatively low risk (relative, for instance, to purchasing shares in a company called “Badly-Wrapped Presents Limited”). So; if a pension scheme has low risk investments (as it probably should have if it is, let’s say, a mature scheme), the value of those investments is not likely to fluctuate as widely or as wildly as, for instance, the value of shares in a company such as Badly-Wrapped-Presents Limited between summer and winter. The cost of low risk investments, namely Government securities and bonds, has increased of late and this has had an impact on the value of scheme liabilities; they have increased. This has made the size of many pension scheme deficits increase and this, in turn, has caused some people to question the wisdom of valuing pension scheme liabilities with reference to Government securities and bonds. One of those persons, a Mr Michael O’Higgins, claimed in the Financial Times of Monday 12 December that there are “better ways” of assessing scheme liabilities and that these ways should be employed in order to allow the 6,000 or so British companies with “traditional” defined benefit pension schemes to pay less money to their pension schemes and, instead, invest (that word again) the money in the company’s commercial development. On the basis that one of Mr O’Higgins’ previous jobs was chairman of the Pensions Regulator, his comments have some edge. His comments have, predictably, come in for criticism from other commentators who think that Mr O’Higgins should stick to his new job (chair of the Local Pensions Partnership – a collaboration of two local government pension funds) and refrain from suggesting to other pension schemes that they ought to take a less conservative approach to the way they value liabilities. The way to address scheme deficits (those commentators indicate) is to invest scheme funds in a more efficient way and produce a better return. This is, of course, easier said than done and it made PN think again about the value of shares in a business such as Badly-Wrapped-Presents Limited.
There are many people (they are mainly men) who are as bad at wrapping presents up as PN and most of them would be ready to part with a small stack of cash in return for a wrapping-free Christmas Eve. PN himself recalls with a shudder Christmas Eve last year (or it may have been the year before, it may have been both) when, at 22:00h, he realised that he still had all his Christmas presents to wrap. At that moment, PN would have parted with a lot of money (including some money he would have been prepared to borrow), on a service which would have sorted out his problem whilst he, PN, wandered off to the kitchen for a mince pie. If Badly-Wrapped-Presents Limited could have taken delivery of his presents a week before the big day then that would have saved PN the additional problem of “hiding” his presents. PN is only marginally better at hiding presents than he is at wrapping them. Whereas PN’s spouse could hide a whole panzer division in the house without PN knowing about it. PN would probably be unable to hide a bow and arrow without it being detected. PN shelved his immediate problem and reflected that at least nobody in his house had asked for a bicycle. Now THERE is a present that few of us would want to wrap up.
You, the reader, are now nearer to the end of 2016 and Christmas than you were at the beginning of this piece so; PN wishes each of his readers a very happy Christmas and remember; wrap up well.
Until next time……..