Just back from a couple of great (sunny!) days in Edinburgh for the institute of actuaries conference which importantly this year incorporated pensions, investment and risk components together for the first time.
Quite a lot of interesting takeaways and observations from around the industry. As Marian Elliott said in the first session “To the worm that lives in horseradish, the whole world is horseradish”. The point being it can be helpful to get a different perspective on things from the one you usually have.
Here are the big 3 things I took away:
1. Integrated Risk Management (IRM). The pensions regulator continues to stress the importance of IRM in the latest funding statement here, and the IFoA working group has made progress thinking about the issues.
My takeaway was that this remains a work in progress in that no-one has (yet) put forward the “perfect” framework for looking at these three components and bringing them together in an intuitive and practical way (possibly, that doesn’t exist). What the working party has done is given considerable thought to a number of worked examples that act as “corner cases” and challenge people to think qualitatively about those different components of risk, what investment and funding strategies should result and key metrics to track to best monitor.
With some of the current high profile cases in the news, the examples seemed very pertinent. It’s clear that thinking in some of these cases has to come back to the member perspective, and what gets the best outcome for members benefits, and this inevitably includes thinking about the possible interaction with the PPF, something that clearly has to be handled carefully.
While this remains a work in progress I think the thinking that went into the worked examples, including legal opinion on certain points, is a welcome contribution to this important area. The suggested further reading (including the Blake / Harrison paper The Greatest Good for the Greatest Number looks interesting and I look for ward to reading further)
The session ended with a challenge to the audience – someone needs to take the initiative and bring these strands together. The working party proposed that actuaries are well placed, I would argue that the investment consultant is, too. The WP expect to communicate more toward the end of the year, I look forward to continuing the conversation.
2. British Steel
Not surprisingly this seemed to be one of the major talking points of the conference over many a coffee and beer. It’s putting the issue of pensions on the front pages of mainstream papers and into the general public discourse in a way that I haven’t really seen during the rest of my career (possibly you need to go back to the 1990’s and Maxwell to find a similar time). The panel discussion organised to address the consultation and the profession’s possible response was remarkable both for the number of people filling the room, and the strength of views expressed. This session was explicitly under “Chatham house rules” so I won’t share too many details, but fair to say there was a lot of questioning of the need to make this scheme a special case, and the danger of making up legislation and precedent “on the hoof”. A couple of interesting prior cases were mentioned including British Midland/Lufthansa which I need to read up on.
The discussion of the individual consultation options was interesting, albeit somewhat drowned out by the wider question of whether creating a special case is the right thing. What was clear is that there is an increasing acknowledgement that the ability (or not) of any scheme to move benefits from RPI to CPI may essentially be an accident of drafting and in effect is a lottery. I strongly suspect that whatever happens to British Steel we haven’t heard the last of the CPI/RPI debate which looks set to continue rumbling on.
3. Endgame & Self sufficiency management
Paul Sweeting of LGIM wrote a recent paper on a blueprint for self sufficiency management, and this got quite a few mentions. It’s a welcome contribution to the area and ties in with a lot of our thinking. The use of contractual cashflow, and alternative metrics for risk, with a nod to the practice and mindsets of the insurance industry makes a lot of sense.
the key findings of the paper are:
- Focusing on the probability of paying all benefits is a helpful metric for end game schemes (more so than VaR or volatility);
- For schemes that are well funded enough, corporate bonds are the best asset to hold to maximise this metric;
- Allowing for defaults, downgrades and being dynamic with decision to reflect changes in spread level is important;
- Conventional mark-to-market volatility becomes less of a consideration;
- Where liability present values are needed, the corporate bond spread can be embedded into the discount rate, to create matching of assets and liabilities.
While probably not that many schemes are in the end game yet, as we noted in this blog it is important to set out with this destination in mind, even if it is some way off. And as we know from survey data many schemes have self-sufficiency in mind as a goal. A useful first step is to make sure they have advisors and fund managers in place with a clear and sensible plan to construct and implement a strategy to deliver the scheme’s self-sufficiency goal.