Another nail in the coffin of DB

Further to my post earlier in the week, Matching pension liabilities, the story that led the front page of the FT today, Companies face bigger pensions risk levy, points up the problem and choices that employers with defined benefits schemes face. One further thought. Norma Cohen suggests that the effect of proposals signposted by Partha Dasgupta, the chief executive of the PPF could

“prompt schemes to pare the billions they have invested in equities and would likely lead to demands the government do much more of its borrowing in long-term index-linked gilts that mirror the movements in pension liabilities more closely than any other asset class.”

And that will, in time, radically change the investor profile of many of our leading companies.

The death of defined benefit

Although it may still be premature to announce the death of defined benefit pension schemes, their days are numbered. As reported this morning in the FT, another pensions consultancy, Aon Pensions Consultants, has warned that

Final salary pension schemes face their worst ever deficits if plans go ahead for new accounting standards and more generous assumptions about life expectancy.

To the pensions industry this is old news (and the defined benefit scheme has in truth been an inordinately long time in dying: I was advising on changing schemes more than 15 years ago), but there is another and equally important aspect. Most public sector schemes are salary and service related, and the cost of these schemes is already far higher than many people realise. Changing the assumptions for life expectancy will only make things worse. The government recognised that action needed to be taken in relation to the state pension, and whether or not Personal Accounts are the right anwer (I am not convinced), the nettle was grasped. Unfortunately this has not been the case with public sector pensions. It will have to be, because the burgeoning costs of these pensions is a millstone around the neck of the public purse: and the quid pro quo (of receiving below private sector pay but enjoying a full pension promise) is not as persuasive an argument as hitherto. But don’t hold your breath for this government to do anything about it.

Personal accounts

I never cease to wonder at the uncritical belief this government seems to have in the digital age. Leaving aside the reports of lost or missing data, failed or failing projects and costs out of control, the success or failure of one of this government’s flagship projects, Personal Accounts, will it seems depend on whether the IT will stand the strain: on day one, 5 million people are likely to be enrolled. It may be a little over four years away, but that is a very short time period to ensure that everything will be in place and ready to go (the fiasco with patient records points up the risks). And the real problem is that no one knows at the moment what the detail will be, what will be needed and what the effect will be. This last is critical for another reason. The legislation is currently on its way through Parliament, and the necessary Act will be made before the end of the year. But it is only now that the Government has commissioned a report on how Personal Accounts will affect people. Will they be appropriate for all employees? And if not, how does this square with compulsion?

Who to believe?

If you believe the government, the chances of our children living as long as us is not certain. For example, according to the Department of Health,

Obesity is associated with many illnesses and is directly related to increased mortality and lower life expectancy. Tackling obesity is a government wide priority.

But how should we reconcile this with the information coming out of the Pensions industry. See two recent reports in the FT, Companies face up to the real cost of pensions and Proposals to add pressure on pension funding. The evidence is that we are all living longer, and will go on doing so (pace the Department of Health).  What perhaps concerns the government is that illness will not kill us so quickly, so the cost to the next generation will be greater.