The Madness of "Mark to Market" Accounting: Destroying our Pension Futures

Last week I heard that one of our employers wants to meet my trade union branch to "discuss" closing their defined benefit pension scheme. At the same time an union pension trustee colleague sent me this link to an article by the "Daily Telegraph" on defined benefit  schemes struggling to stay open.

The article itself was as usual for the "Torygraph" ill informed and biased, shaped by the self interest of it's owners and its advertisers' but what I found interesting was in a on-line comment by "mchenry" about final salary schemes.

I support mchenry's argument that a key reason why private companies have been closing their  pension schemes and therefore creating "penury for millions of ordinary workers in the future" is not to do so much with people living longer or the (mistaken) past taxation of pension funds but instead it is "a frankly insane requirement to value long term liabilities spread over decades via volatile short term measurements". This is the legal accounting requirement of pension schemes called "Mark to Market" (or even more laughable - "Fair value") Accounting.

What this means is that pension fund liabilities (the promises made so far by the scheme to pay pensions now and in the future) which may be spread over the next 60 years are costed using completely daft and inappropriate means. UK Government bonds which are currently on a 200 year all time historic low have to be used to price the future cost of pensions to the scheme even if this notional cost is decades and decades from now.

Would you take out a £150k mortgage to buy a house if depending on events entirely out of your control this mortgage liability could just jump up in a matter of months to £300k? Also if your credit rating was based on your ability to pay all your loans and mortgages off immediately - would you be declared bankrupt?

Which is all completely and utterly bonkers.

"Mark to market" accounting makes it appear that perfectly good pension schemes are in massive deficits. These "deficits" have also been completely unpredictable and volatile in recent years and months. Since the so called "deficits" must appear on the company accounts, no wonder some finance directors  panic.

Not only this but because of these entirely artificial measurements the investment policy of pensions schemes is being driven entirely off course by this "funny money" calculation.   Schemes may be tempted to take all sort of riskier investment options or even buy totally unnecessary insurance policies to reduce these artificial "deficits".

Look, there are huge problems and challenges that defined benefit schemes need to face. But we need to deal with the real problems of uncertain market returns and longevity not stupid accounting rules  no matter how well meaning. Unless we sort this out millions and millions of Brits will be spending the latter part of their lives in the misery of abject poverty.

In defence of DB

This is an article I wrote on behalf of the AMNT in defence of Defined Benefit Pension schemes for all.  It was published in Engaged Investor in its December edition.

"While the Association of Member Nominated Trustees (AMNT) has no formal view on the dispute between the Government and the public service unions, many of our
trustees are strong supporters of defined benefit (DB) schemes. 

In fact, one of the most active AMNT working groups is dedicated to defending and promoting DB schemes and almost exclusively comprises private sector DB trustees. This group is convinced that DB should remain the cornerstone of occupational pension provision.

DB trustees are also concerned that the often inaccurate media attacks on public sector DB schemes are having an adverse impact on the standing of their schemes with their sponsors.

It is often forgotten that alongside the six million workers in the public schemes there are still 2.4 million continuing to build up DB benefits in private schemes. It is important that
the pension myths about all DB schemes are exposed and countered.

The first myth is that DB is “gold plated”. The average local government pension is only £4,000 per year while the average retired female NHS worker’s pension is less than £2,800 per year. The maximum that many retiring today will get in typical DB schemes is half pay and a lump sum typically 1.5 times their final salary. Are people really saying half pay after a lifetime of saving is too much?

Another myth is that DB is too expensive. Future employer contributions for many schemes are less than 14% and with some, such as the NHS’s scheme, it has already been agreed that employer contributions are capped at 14% and any future increase in cost will have to be wholly met by the employees.

In the absence of compulsion, unless we have pension schemes which are attractive to employees then people will simply not join or opt out. This will leave the taxpayer with an even greater bill to support these people on the poverty line when they are old.

Nobody is arguing that DB schemes are perfect, or that hugely damaging mistakes were not made in the past. Deficits for past accrual are often confused with future costs of DB, however. Most DB trustees remain convinced that people want a degree of certainty in their retirement. They want to share the investment risk with the employer and the state, not to personally bear the brunt of it.

There are many changes that could be made to improve DB. These could include merging DB funds and schemes; bringing together the 100 or so different local government pension schemes.  We need changes in the accounting standards that currently treat century-long pension benefit liabilities as if they were a credit card bill. We need to get a grip on spiralling fees. We need to improve governance and make sure that savers are not ripped off in future financial scandals.

The real scandal in pensions is not DB schemes but the two thirds of private sector employers who do not pay a penny towards their employees’ pension and the 50% of private sector workers who have no pension provision whatsoever".

AMNT Presentation to Irish Banking Trade Association

Yesterday, during a visit to their headquarters in Dublin, Janice Turner, the Joint Chair of the Association of Member Nominated Trustees (AMNT) and I gave a 45 minute presentation to the Irish Bank Officials Association (IBOA) National Executive Committee.

The IBOA represents 22,000 finance workers in the Republic and Northern Ireland. It has has been very supportive of the AMNT and its lay pension trustees NEC have played a key role in our growth. Their members are in Defined Benefit (DB) and Defined Contribution (DC) pensions schemes.

Being finance workers they are acutely aware of the value of pensions and the threats that all their schemes currently face. The employer pension "promise" and "covenant" is under attack. For example the UK regulated Banks suffer from unnecessary and damaging accounting standards while in the Republic there is also no equivalent of the Pension Protection Fund (PPF).  This needs to be challenged.

I think that the IBOA committee members and officers appreciate that the AMNT is the only organisation that is run solely by member nominated pension trustees who want to not only defend and promote DB but also want to improve all DC schemes as well.

At some point in the future it would make sense to try and organise local pension training and briefings by the AMNT outside London. 

Many thanks to the IBOA for the warm welcome and hospitality they showed to us during our visit.

AMNT Pension Week article on Governance & the LGPS

I wrote this article on behalf of the Association of Member Nominated Trustees (AMNT) last month which was published in Pensions Week.

I tried to answer the following question. "I have just been elected as a trade union employee representative on my local government pension scheme. What should I do next?".

Quick plug for the next open meeting of the AMNT on 23 February 2012. One of our speakers is Con Keating. Who is one of the leading proponents of Defined Benefit (DB) Pensions Schemes.  To attend this event join the AMNT here.

(NB I am Chair of the AMNT DB working group not the AMNT as stated in the Pension Week article)

SERTUC Regional Council motion: Response to Government Economic Policies

This is a picture of me addressing the recent SERTUC (South East Regional TUC) Council meeting.

(Yes, I must remember to stick my head up from my speech notes when speaking).

Motion 1 was about the "Response to Government Economic Policies". It was quite a good motion which I spoke in favour of but I felt that it needed to be emphasised what November 30 should really be about.

"President, Council....Winning the Ballot with a big majority and a big turnout then making strike action on November 30th a success, is indeed the 1st important counter attack against this Government's policies.

But as a member of the Local Government Pension Scheme for 20 years and currently facing a bleak pension future. If we win the ballot then the strike action on November 30 is first and foremost an industrial issue. It is an industrial dispute around the fundamental threat to a basic term and condition for all workers. The right to a safe and secure future in retirement.

And we must continue to remind the public that this is a last resort industrial dispute brought about by the abject failure by this Government to negotiate.

The focus on November 30 should be the picket line. Winning the dispute with effective pickets on every single town hall and public building. Leafleting the public, talking to them about our cause, supporting hospital workers at their lunch time protests, then maximising turnout at rallies and lobbies.

Also as someone who now works for a private organisation that does not offer its new employees a safe and secure defined benefit pension. As part of this fight back we must never forget the 2/3 of employers in the private sector that do not pay a penny towards the pensions of their staff nor the horrific figure that 50% of all private sector workers have no pension provision whatsoever.

However, despite the impression given by the Daily Hates and the Tax Evaders Alliance, don’t forget that as well as the 6 million in public service pension schemes that there are still 2.4 million private sector workers who are still accruing service in private defined benefit schemes. They know if the public service defined benefit schemes collapse - so will theirs.

Council, the message to all workers, public and private sector, must be quite clear, that on 30 November we will be striking to defend safe and secure pensions for all".