Questionable data, questionable policy: Why we need to place DB pensions policy on firm foundations

by and

26 Mar 2024

Con Keating is head of research at Brighton Rock Group, an insurance firm for pension schemes, while Iain Clacher (pictured) is a professor of pensions & finance at the University of Leeds.


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Con Keating is head of research at Brighton Rock Group, an insurance firm for pension schemes, while Iain Clacher (pictured) is a professor of pensions & finance at the University of Leeds.

The Pensions Regulator’s (TPR) quantitative analysis is central to the impact assessment of the new funding and investment regulations.

TPR’s data is based upon scheme returns, to which models are applied to derive an estimate of asset values. However, these scheme returns are between two to four years out of date.

Simply put, these models cannot cope with the unprecedented developments of 2022/23, nor do we believe they can adequately capture the level of leverage in schemes, which was a material factor in the LDI crisis.[i]

While TPR’s data suffers from significant lags in collection, the Office for National Statistics (ONS) conducts a quarterly survey of scheme assets and investment liabilities.[ii]

As of September 2023, TPR’s models overstate scheme asset values as compared with the ONS by £249bn; ONS assets are £1.12bn and TPR assets £1.37bn. This discrepancy has steadily developed since December 2021, when the ONS reported scheme assets of £30bn above TPR’s estimate.

Our interpretation of this is the failure of TPR’s asset models to capture the effects of leverage, collateral calls and scheme rebalancing over the period, all of which were material during 2022 and into 2023.

How well funded are schemes?

This significant difference in asset values calls into question the pronounced improvements in technical provisions (TP) scheme funding claimed by TPR – from 103.3% to 127.4% (23.3%). If we take TPR’s estimate of TPs and use ONS asset values, the ONS assets imply a small decline in the overall funding of DB schemes of 105% to 104.3%. By ONS statistics, 57% of schemes are in TP surplus, not the 87% claimed by TPR.

We should also offer a small caveat here, in the use of TPR’s liability value. Over the period, TPR appears to have lowered the spread above gilts of the liability discount function from 126 basis points to 100 basis points.

The cut will tend to overstate the liability value, by 5%. Adjusting the liability values to reflect this would increase the ONS funding ratio to around 110%, and the number of schemes in TP surplus to 3,530, or 70% of schemes. Our hypothesis here is that TPR’s discount rate of 1% is lower than that being used by schemes in practice.

Low dependency funding and management strategies are the core of the proposed new funding regulations. Using TPR’s figures, we see a 33.8% improvement in the funding ratio, but this would be just 7.7% by the ONS estimates. Schemes in low-dependency deficit improve from 77% to just 20% using TPR’s figures, but the improvement is far less pronounced using the ONS asset estimates, from 75% to 54%.

If TPR were correct, there would effectively be no cost to the low dependency regulatory requirement. TPR indicates that schemes in surplus at September 2023 had a surplus of £225bn, which with an aggregate surplus of schemes of £206bn, would imply that schemes in low-dependency deficit had a deficit of just £19bn. All else equal, the schemes in deficit under the ONS figures would be £268bn.

Conclusions and policy implications

TPR’s analysis was fundamental to the impact assessment of the proposed new funding regulations. In light of the ONS survey results, we have no confidence in that assessment. The costs of the legislation look to be extremely high.

If the ONS figures prove accurate, this will place a large new funding requirement on sponsors. Clearly, this would run counter to the long-term productive investment policy of government and the Mansion House agreement.

Our own modelling suggests that this cost will be of the order of £150bn to £200bn, rather than the £268bn above. The cost of corporate taxes foregone would be of the order of £30bn to £40bn.

We can expect reality to become evident as scheme returns are filed over the 2025 to 2027 period. However, waiting until 2027 for this picture to emerge from TPR’s scheme returns will place a huge burden on sponsors, starving businesses, and the economy, of much needed capital for investment and growth. 

With this in mind, we believe it would be sound and rational risk management to defer passage of the new funding regulations until such time as the uncertainty in the aggregate funding position of defined benefit pension schemes has been resolved.

Notes and references

[i] There are three channels used by schemes to gear their investment holding, direct (e.g, repo), derivatives (e.g, interest rate swaps) and indirect (e.g, borrowing within a pooled investment fund). All are material in their own right.

[ii] Currently the ONS does not capture pension scheme liabilities, but this is something that the ONS is planning to capture in the future.


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