Is your pension glass empty?
An optimist sees the glass as half-full; the pessimist sees it as half-empty.
The actuary sees it as somewhere between 40% full and 40% empty, depending on a large number of assumptions.
As a pensions actuary, I have felt more like the harbinger of doom in recent days, delivering valuation results, accounting disclosures and funding updates with 30 June 2016 effective dates.
The PPF barometer of pension scheme funding, the 7800 index, is now showing an aggregate deficit of £384 billion and an aggregate funding level of around 78%.
We have reached a new nadir in pension scheme funding levels not seen since 2012 and before that in 2009.
This is despite years of massive deficit funding contributions and pretty buoyant investment markets for much of this time. Asset values have increased, but the value of liabilities have increased even faster.
As such, many commentators are searching to find anything in the glass, never mind ponder over its half-fullness or half-emptiness.
However, I've decided to look for some positives, so here it goes;
- Previous low points have been overcome, and in some cases very quickly.
- Pension schemes are a long-term project, so we all have a long-time to fix the current difficulties.
- Small changes in interest rates can make a big difference – a 1% a year fall in long-term rates would reduce the value of an average pension scheme's liabilities by about 20%.
- Trustees and schemes have many more tools in their armoury to manage their way out of difficulty than ever before – including access to up to date information and access to wider and more sophisticated asset classes than ever before.
- There is likely to be periods of significant volatility in the coming years – this will give pro-active trustees and advisors the ability to lock-in to positive positions that may well be short lived. This could allow many schemes to slowly climb what looks like a pretty big mountain.
We all know some schemes won't make it to the successful conclusion of paying all members' benefits in full and maybe they need to accept that and act accordingly.
However, for the currently squeezed middle who can hang-in for the long-term, there will hopefully be better periods in the future.
I see interesting times ahead, with challenges and opportunities.
Trustees and scheme-sponsors must assess where they want to get to, how they might get there and make sure they are able to act (or someone can act on their behalf) when opportunities arise.
Alan Collins, Head of Pension Scheme Trustee Advisory at Spence & Partners