Taking the longer term view
Harriet Maunsell, head of UK pensions regulator OPRA, makes a cautious analysis of the recent gloomy reports about a so-called ‘crisis’ within the UK industry. “Remember, gloom is news whereas good news isn’t,” she says.
Although she accepts problems exist, her analysis is more qualified. “I try not to use the word crisis because it alarms people. I’d describe the situation we face as a series of quite serious problems for very different groups within the industry.”
Falling markets, for example, have created problems for employers and trustees; insufficient saving levels are likely to cause both government and consumers a headache while living longer is putting a strain on insurers, trustees and employers.
“It’s quite a complicated web we’ve got because on the one hand there are some pensioners that are doing fine although they tend to get talked about less. On the other hand there are many pensioners who are living in appalling and unacceptable poverty.
“So we’ve got very different groups and where you’ve got different problems and different groups and timing, you’ve got a very complex situation. I’d use the word crisis to describe a particular problem that you need to solve now. But pensions issues are problems that cannot be solved by the flick of a pen or by opening a cheque book, they need longterm change.”
She maintains that solving the problems cannot be done in isolation. “Some of the commentators on pensions have tended to focus on one issue which is helpful in that it pulls out the different strands.
“However, the current issues cannot be resolved by one government department. No 10, for example cannot do it without the Department for Work and Pensions and the Treasury. And the Department for Trade & Industry cannot do anything to solve it without the employers and individuals doing more.
“There are a number of people who have to change what they are doing if things are going to go right and even if they do work together, there’s no guarantee it’ll be perfect”
As to how serious the longterm consequences of deflated equity markets, she says: “the interesting question about how serious a predicament schemes are in, the answer is that nobody really knows.
“There are some finance directors who seem to be fairly bullish and I think that, in some ways they’re right. If the accounts show a deficit, well we’re usually talking about a life of a scheme that’s going to have at least another 80 years to run and a lot can happen in 80 years.
“I remember the deficits in the 1970s and that arose because of wage inflation. Everybody was funding for wage increases of 1-2% when salaries were going up 15 or 20%. Everybody went into deficit but suddenly returns got better, people left schemes and suddenly at the beginning of the 1980s they were in surplus again. I think there’s at least a 50:50 chance that something will happen this time that will turn the situation around and put all the funds back into surplus again.”
Much of the analysis and commentary in the press, she says, is in many ways similar to the accounting standard FRS17 in that it takes a snapshot, an isolated diagnosis.
“What we are reading is extracts from company accounts showing what state the pension scheme is in without a fully informed discussion by the trustees and employer accompanying it saying what they are going to do about it.”
As for the balance between security and long term returns and the shift from equity to fixed income, Maunsell says this is another subjective judgement.
“The need to take a longer term view is absolutely right because of the perspective of the pension scheme constituents. We’ve got those members that are pensioners now, we’ve got the deferred pensioners who may not be coming in for 20 or so years and we’ve got the active members who may not be taking their pension for, say, 40 years. It’s a very subjective call.”
With regards the switch between equity and fixed income, this is a decision that trustees and employers have to take according to the needs of their pension scheme.
“I’m extremely glad I’m not a trustee. I’d find it very difficult thinking about it in the abstract. Perhaps it’s easier once you look at one scheme in its particular industry and its particular company’s long term prospects and then you maybe better able to see whether you should head for equities or bonds.”