Pension Scheme Deficits: Practical Solutions

Consulting Editor: Steven Hull

273 pages hardback  ISBN 1-905783-08-6 / 978-1-905783-08-3 (HB)

Price: £120 (€167)

2007, Global Business Publishing Ltd, London, UK

This is a useful new book about pension fund deficits and how to deal with them in practice. The publisher intends to fill a gap by providing "the only comprehensive guide" for people exposed to funding problems of defined benefit (DB) schemes, including finance directors, pension managers, members and their advisers.

It is written by practitioners for practitioners, and the aim is "to introduce the lay pensions reader to the key issues and provide a basic grounding in the complexities encountered when finding money to plug a hole". Although the publication is UK-centred, some insights may be of wider interest.

The publication is in handbook-style and contains 25 contributions written by 29 different contributors. Somewhat surprisingly, they are almost exclusively pension lawyers or actuaries. This may also be a reflection of the traditionally strong influence of these two professional groups on the UK pensions scene.

It is no secret that the UK occupational pensions system has been severely shaken in this decade. Many employers have withdrawn, reduced or reshaped their benefit promises. The politicians responded with the introduction of a more powerful Pensions Regulator and a new guarantee system, the Pension Protection Fund.

It is not easy to keep on top of all the changes in recent years, even for the experts. With an average length of 10 pages, the 25 articles provide a concise overview on the new landscape of pensions regulation. The book is divided into nine parts with a straightforward sequence of themes:

1. History (includes an account of the manifold reasons for underfunding as well as the bizarre multitude of valuation standards in place in the UK);

2. Alternative methods of deficit reduction (scheme benefit changes, and their limitations; move to defined contribution or career-average plans; contingent assets as an alternative to cash contributions, etc);

3. Investment (in particular the trend to broader asset class diversification and liability-driven-investing);

4. Practical considerations (eg legal position of trustees and employers, member consultation and communication);

5. The Pensions Act 2004 (including the new scheme-specific funding standard and the stricter rules affecting corporate transactions);

6. Development of the buy-out market;

7. Corporate and scheme governance (eg how to handle conflicts of interests);

8. International section, with examples of deficit reduction in Ireland, Germany, Canada and the US;

9. Outlook.

One of the strengths of the publication is that it provides a clear snapshot of a regulatory regime in evolution despite the many uncertainties surrounding it. The flipside is, of course, that some parts will be soon be dated. An example is this year's sudden re-appearance of the overfunding issue, an old friend from the 1990s. But how to best deal with surpluses in the new regulatory regime? Surely, this should be worth an extra chapter.

We are continuously reminded not only of the complexity but also of the variety of UK pension plans (there are an estimated 10,800 DB plans alone). "No two schemes are exactly the same… and the nature of the legal problems facing the employer and the trustees will depend on the specific circumstances and the relevant documentation" (p. 125).

However, the book offers some much-needed help. Most contributions are written to the point and easy to understand, despite the technical subject matter. The degree of overlap across the articles is low. There are a number of case studies but one would have hoped for more practical examples, given the title of the book. It appears unforgivable, however, not to have included an index in the back of a publication of this kind.

Overall, the legal perspective appears predominant in this book, as it is often the case in the UK in comparison to other countries. Given the flood of new rules and regulations, this is understandable to an extent. However, investment bankers, asset managers, finance executives, business consultants, economists and academics have been increasingly involved in designing and implementing new approaches to funding solutions. Much of that perspective is missing.

The focus of the publication is too narrow. In particular, the understanding of asset-liability-management, strategic asset allocation and risk management is essential when dealing with pension deficits. These terms may not be used in UK pensions law in a narrow sense, but the Pensions Regulator is aiming at "risk-based regulation", with strong practical implications for pension schemes.

The international section in the book could have been an opportunity for widening the perspective more significantly, by looking at different to risk-sharing (in the Netherlands for example) or at the new emphasis on risk-based supervision along the lines of the insurance industry, already to be found in other places of Europe.

Georg Inderst is an independent adviser