Mick Lynch (assistant general secretary, National Union of Rail, Maritime and Transport Workers) also appears on the Radio 4 interview yesterday with John Ralfe. Starts around 20:30. There is no problem, according to Lynch.
Well it’s no surprise to me that in the New Year with a new Tory government we get an advocate of closing final salary schemes, advocating that there should be reform and verging on closing them. The scheme is not in trouble the way it’s been described [by Ralfe].
Lynch has every right to be angry. The companies sponsoring the pension schemes have made a promise, i.e. a certain performance over the risk free rate, that it turned out they couldn’t make. Yet he vents his anger on the messenger, choosing to disbelieve that the promise has been broken, or will be broken.
It is the same story with the Universities Superannuation Scheme. USS made promises to employees to pay pensions at a defined rate, but it now looks increasingly difficult to meet those promises. Employees and their representatives rightly insist on keeping promises, but (wrongly) support valuation methods which conceal the extent to which the promises haven’t been kept.
In other news, the Church the £1.8bn (€2.1bn) Church of England Funded Pensions Scheme (CEFPS) announced a deficit reduction of nearly £200m, achieved by “changing its valuation method for liabilities” i.e. the actuaries’ magic wand.
The scheme previously used the “gilts plus” method, basing the discount rate for future pension payments on the yield from gilts plus a margin representing factors such as asset outperformance and the need for prudence. It has now switched to the asset-led funding method, basing the discount rate on the long-term return from its portfolio less a prudent “haircut”.
“Asset led funding” is a lovely name for the weirdest emanation of the human mind.
Aaron Punwani, partner at LCP and scheme actuary to the CEFPS, said the CEFPS was in an unusual position, as a large scheme that is open to new members and with a policy of investing a higher proportion of its assets in long-dated illiquid investments and less in gilts than the typical scheme. Punwani said: “This lends itself to using the asset-led funding method, whereby the investment return assumptions are driven from the yields on the investments the scheme expects to hold over the long term, rather than purely from gilt yields. This closer alignment between the investment strategy and the actuarial valuation should result in a more stable funding position over time.”
Jameson [chief investment officer for CEPB] said: “The supporters are very much in favour of the change in valuation methodology because it provides a significant dampening of volatility.”
My emphasis, and words fail.