Momentum Conference 2011: Review of Workshop D3: The problems with funding

Con gave a talk on the funding of pension schemes, coming from the viewpoint that funding (and in particular the current funding pension regulations in the UK) has been detrimental to pension provision in the UK.  He claims that a focus on balance sheet insolvency, driven by accounting standards, has driven an increase in pension costs and that one-third of deficit contributions have been driven by regulation. 

Con showed us why this is the case with an example of a UK valuation where the Trustee’s reaction to a 0.1% increase in insolvency likelihood (but no change to D&B score) was to reduce the discount rate used for technical provisions liabilities by 0.18%.  He went on to show us an analysis of gilt yields and corporate profitability to show that hedging interest rate exposure geared the company and was hedging the regulations, not the real risks arising from pension schemes.  There was also some discussion about Solvency II and why there was any need for a level playing field between Insurers and private sector DB schemes.

The talk was very interesting – a worthwhile return to ‘first-principles’ of financial theory in the context of pension scheme provision.  I feel, however, this would have worked better with a direct challenger to Con’s ideas (for example, someone from tPR defending the existing funding regime).  There was very little time for discussion at the end, which again was a shame, but the questions asked shed further light on what an ‘optimal’ pension system might look like (using pension indemnity assurance).

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