It’s an interesting time of year. The football “season” (if such a thing exists any more, given tours to the Far East by the Premiership clubs and the European Championship), is over. The first Test of the year has started (in Leeds – what a shock, it rained. In May- who would have thought that?). It is slowly dawning on me that the triathlon training that I’ve done over the last eight or so months since I last jumped into open water has been a complete waste of time, as I still get a shock when I put my face in the lake, which sort of negates my ability to swim. Let alone cycle, and then run.
It’s also the time of year when the Pensions Regulator publishes its Annual Funding Statement. Given that the bulk of valuations are either December or April/March it gives trustees a flavour of what the Regulator expects from them; a sort of summary of the Regulator’s take on market conditions, actuarial assumptions and current thinking. In broad terms (and it has to be broad as there is no such thing as an average scheme), whilst investment performance has been strong (say plus 25% over the last three years), gilt yields have continued to fall, and as a result deficits have increased by between 20% to 35% over the last three years. Think about that for a moment. That’s considerable. If deficit recovery end dates are to remain the same, then deficit recovery contributions will, on average, need to go up by over 50%!
But the Regulator is at pains to point out that the ratio of dividends to deficit recovery contributions has dropped from 17% to 10% over the past six years. Keeping end dates the same will require this ratio to increase up to 13%. This is still below where we were three years ago, hence the sharp recovery period increase in required contributions could, they argue, be affordable.
Where does this leave us as trustees? Well – each scheme will have its own specific circumstances. We therefore have to take a considered look under the bonnet and really establish what is affordable. Or face a Regulator, which has come under considerable criticism from MPs over its handling of the BHS case. (Which, incidentally, and I should stress this is a very personal view, has been very unprofessionally reported in various aspects of the non-pensions press, who would love nothing more than Sir Philip Green’s head on stick rather than focusing on the fact that thousands of members aren’t going to get the pensions they thought they were in line for, and what long-term should be done about that).
We’ve got to consider integrated risk management – looking at all three aspects of funding, investment and covenant together, which brings me back to triathlons. Three disciplines all interlinked. If the water is cold, I struggle. Gilt yields seem to be staying lower for longer. The investment water isn’t warming up any time soon. It’s time to, therefore, think carefully about a pacing strategy. Hope for fair weather, but plan for the unexpected. Like when the cold water hits me in the face in that first instant of the swim.