Have you, as a result of your frenetic activity since Christmas, got a bit of a peer review backlog? I can help. Let me be the scheme actuary you’re temporarily short of. With a 10% discount on the rates shown here until the end of the UK 2013/14 tax year, and a further 10% reduction for type 2 peer reviews.
The Pensions Regulator has a consultation on the go. In fact they have two: regulating defined benefit pension schemes and regulating public service pension schemes. Both started in December and are due to wind up in February. The defined benefit pension schemes one alone runs to over 160 pages across the four documents published. All at the busiest time of the year for most pensions actuaries, caught between the 31 December 2013 accounting disclosures and the looming deadlines for submitting the 31 December 2012 scheme funding assessments. Could it be that they are rather hoping to limit the feedback they get?
Because the changes that are being proposed to the funding regime known as scheme specific funding which has run for 8 years are dramatic. Under the pretext of only making changes to allow the introduction of the Regulator’s new objective to “minimise any adverse impact on the sustainable growth of an employer” (see my previous post on this), they have effectively announced the death of scheme specific funding and proposed a system which looks very much like the Minimum Funding Requirement (or MFR – the previous discredited funding regulations) mark two to me, although the Regulator insists that it will be completely different this time.
The main problem with the MFR was that it was a one-size-fits-all approach (although it did vary in strength depending on how far on average members had to go until benefits were paid – known as the duration of the scheme), which encouraged an inappropriate level of contributions for many schemes (the minimum funding requirement effectively became a maximum funding requirement in many cases).
Fast forward to now, and the new proposed funding approach based around something called the Balanced Funding Outcome (BFO). This calculates a required level of assets for each scheme on an “objective liability measure, independent of the scheme’s funding assumptions”. The actual assets will be compared with the required amount and a recommended level of contributions to get up to the required level will then be calculated by the Regulator. The contributions the scheme trustees have agreed with the scheme’s employer will then be assessed to see if they measure up. Where MFR varied by duration, BFO will vary by duration and covenant (how likely the employer is to stick around to pay the last pensioner). So, as you can see, completely different!
At the end of Appendix G of the 50 page draft funding policy, we finally find the problem that I think the Pensions Regulator really wants to solve:
Look at all those dots. They’re all over the place. There is currently absolutely no correlation between the deficit reduction contributions (DRCs) employers are paying and the funding level in their schemes. The Regulator is determined to change that, by giving trustees and employers sight of their preferred contribution number during their negotiations. The contribution number won’t be compulsory of course, but if you use it then the Regulator will leave you alone. It is almost as if they have never heard of Daniel Kahneman or behavioural economics.
What will happen? Well who knows but here’s a guess. Schemes to the bottom left of the chart above (ie low assets and contributions) are already being subjected to extra scrutiny and generally have employers in such a poor financial state that there is very little they can do about it. But those in the top right will effectively have been given permission to swoop down to the blue line with a whoop of “Pensions Regulator’s new objective”. It will be like the 90s all over again when pension schemes took contribution holidays because they were measuring their funding in an unrealistic way. It will be seen as financially stupid to be in the top right of the Regulator’s graph. Group think will be in charge once more. But, to use another quote from Yogi Berra, the baseball icon, “If you don’t know where you are going, you might wind up someplace else”.
If we agree to this we will be making the pensions system more fragile. The model used by the Regulator will not anticipate the next defaulting economy or other Black Swan that throws currency and financial markets into meltdown (no one was suggesting Argentina would default a month ago) and reduces everyone’s level of funding, so when that happens everyone will be in trouble rather than just the proportion of schemes in difficulties we have now. The overall funding risk of defined benefit pension schemes will be inflated so much that the system may not easily recover.
It gets worse. There is a lot in this consultation about governance, and also references to asset liability modelling, due diligence, reverse stress testing, scenario testing and covenant advice. These are all things which are likely to be a problem for small schemes, which I pointed out previously when they were proposed by EIOPA (because, let’s be clear, it is compliance with prospective EU legislation which has driven many of these proposals). But guess which group are going to see an almost total reduction in the scrutiny they get from the Regulator under the new regime? That’s right: small schemes.
There is still time to register your opposition to reliving the last 15 years of defined benefit pensions all over again: the consultation runs until 7 February.
For those people who are not pensions geeks, let me start by explaining what the Pension Protection Fund (PPF) is. Brought in by the Pensions Act 2004 in response to several examples of people getting to retirement and finding little or no funds left in their defined benefit (DB) pension schemes to pay them benefits, it is a quasi autonomous non-governmental (allegedly) organisation (QUANGO) charged with accepting pension schemes who have lost their sponsors and don’t have enough money to buy at least PPF level benefits from an insurance company. It is, as the PPF themselves appear to have acknowledged with several references to the schemes not yet in their clutches as the “insured” in a talk I attended last week, a statutory insurance scheme for defined benefit occupational pension schemes, paid for by statutory levies on those insured. As a scheme actuary I have always been very glad that it exists.
The number of insured schemes has dwindled since it was named the 7800 index in 2007 (with not quite 7,800 members at the time) to the 6,300 left standing today. As you can imagine, the ever smaller number of schemes whose levies are keeping the PPF ship afloat are very nervous about how that cost is going to vary in the future. They have seen how volatile the funding of their own schemes is, and seemingly always in the worst case direction, and worry that, when their numbers get small enough, funding the variations in PPF deficits could become overwhelming. Particularly as the current Government says whenever it is asked (although no one completely believes it) they will never ever bail out the PPF.
So there has been keen interest in the PPF explanations of how those levies are going to change next year.
PPF levies are in two parts. The scheme-based levy, which is a flat rate levy based on the liability of a scheme, and the normally-much-bigger-as-it-has-to-raise-around-90%-of-the-total-and-some-schemes-don’t-pay-it-if-they-are-well-funded-enough risk-based levy. The risk-based levy depends on how well funded you are, how risky your investment strategy is and the risk your sponsor will become insolvent over the next 12 months.
It is this last one, the insolvency risk, which is about to change. Dun and Bradstreet have lost the contract to work out these insolvency probabilities after eight years in favour of Experian. However, unfortunately and for reasons not divulged, the PPF has struggled to finalise exactly what they want Experian to do.
The choices are fairly fundamental:
So reason for nervousness amongst the 6,300 perhaps? The delay will mean that it won’t be known by 1 April (an appropriate date perhaps) when data starts to be collected for the first levies under the new system next year. Insolvency risk is supposed to be based on the average insolvency probability over the 12 months to the following March, but the PPF will either have to average over a smaller number of months now or go back and adjust the “failure scores” (as the scale numbers which allocate you to a bucket are endearingly called) to the new system at a later date. Again, the decision has yet to be made.
All of this suggests an organisation where making models is much easier than making decisions. And that is in no one’s interest.
Perhaps surprisingly in the audience I was in, the greatest concern expressed was about the fact that the model the PPF uses to assess the overall risk to their future funding (and therefore used to set the total levy they are trying to collect each year) was different from either the current D&B approach, or either of the two possible future approaches, to setting failure scores, ie the levies they pay are not really based on the risk they pose to the PPF at all.
There are obviously reasons why this should be the case. Many of the risk factors to the PPF’s funding as a whole would be hard to attribute, and therefore charge, to individual sponsors. For instance the PPF’s Long-Term Risk Model runs 1,000 different economic scenarios (leading to 500,000 different scenarios in total) to assess the amount of levy required to ensure at least an 80% chance of the PPF meeting its funding objective of no longer needing levies by 2030. Plus it plays to sponsors’ basic sense of fairness that things like their credit history and items in their accounts (although perhaps not including, as now, the number of directors) should affect where they stand on the insolvency scale, rather than things that would impact more on PPF funding, like the robustness of their scheme deficit recovery plans for instance.
It is rather like the no claims discount system for car insurance. This has been shown to be an inefficient method for reallocating premiums to where the risk lies in the car driving population, and this fact has been a standard exam question staple for actuarial students for many years. However it is widely seen as fair by that car driving population and would therefore be commercial madness for any insurer to abandon.
So there we have it. The new PPF levy system. Late. Not allocating levies in accordance with risk. And coming to a pension scheme near you soon.
It’s a relatively new science, and one which binds together many different academic disciplines: mathematical modelling, economics, sociology and history. In economic terms, it is to what economists in financial institutions spend most of their time focusing on – the short to medium term – as climate science is to weather forecasting. Cliodynamics (from Clio, the Ancient Greek muse or goddess of history (or, sometimes, lyre playing) and dynamics, the study of processes of change with time) looks at the functioning and dynamics of historical societies, ie societies for which the historical data exists to allow analysis. And that includes our own.
Peter Turchin, professor of ecology and mathematics at the University of Connecticut and Editor-in-Chief of Cliodynamics: The Journal of Theoretical and Mathematical History, wrote a book with Sergey Nefedev in 2009 called Secular Cycles. In it they took the ratio of the net wealth of the median US household to the largest fortune in the US (the Phillips Curve) to get a rough estimate of wealth inequality in the US from 1800 to the present. The graph of this analysis shows that the level of inequality in the US measured in this way peaked in World War 1 before falling steadily until 1980 when Reagan became US President, after which it has been rising equally steadily. By 2000,inequality was at levels last seen in the mid 50s, and it has continued to increase markedly since then.
The other side of Turchin’s and Nefedev’s analysis combines four measures of wellbeing: economic (the fraction of economic growth that is paid to workers as wages), health (life expectancy and the average height of native-born population) and social optimism (average age of first marriage). This seems to me to be a slightly flaky way of measuring this, particularly if using this measure to draw conclusions about recent history: the link between average heights in the US and other health indicators are not fully understood, and there are a lot of possible explanations for later marriages (eg greater economic opportunities for women) which would not support it as a measure of reduced optimism. However, it does give a curve which looks remarkably like a mirror image of the Phillips Curve.
The Office of National Statistics (ONS) are currently developing their own measure of national well-being for the UK, which has dropped both height and late marriage as indicators, but unfortunately has expanded to cover 40 indicators organised into 10 areas. The interactive graphic is embedded below.
Graphic by Office for National Statistics (ONS)
I don’t think many would argue with many of these constituents except that any model should only be as complicated as it needs to be. The weightings will be very important.
Putting all of this together, Turchin argues that societies can only tolerate a certain level of inequality before they start finding more cooperative ways of governing and cites examples from the end of the Roman civil wars (first century BC) onwards. He believes the current patterns in the US point towards such a turning point around 2020, with extreme social upheaval a strong possibility.
I am unconvinced that time is that short based solely on societal inequality: in my view further aggravating factors will be required, which resource depletion in several key areas may provide later in the century. But Turchin’s analysis of 20th century change in the US is certainly coherent, with many connections I had not made before. What is clear is that social change can happen very quickly at times and an economic-political system that cannot adapt equally quickly is likely to end up in trouble.
And in the UK? Inequality is certainly increasing, by pretty much any measure. And, as Richard Murphy points out, our tax system appears to encourage this more than is often realised. Cliodynamics seems to me to be an important area for further research in the UK.
And a perfect one for actuaries to get involved in.
Source: Creative Commons
An interesting article on solar cycles in this month’s Actuary magazine was spoilt for me by the attempt to smuggle in man made climate change denialist assertions within it. Brent Walker says that understanding the sun-climate connection requires a broadly similar skill set to that needed to become an actuary. Unfortunately, basic statistical literacy, the minimum which might be expected of an actuary, appears to be absent from his claim that there has been a pause in global warming despite soaring carbon dioxide levels in the atmosphere.
It is very difficult to construct downward trend curves from the average surface temperature data, but that does not seem to stop people, many of them funded by energy companies with much to gain if the need for green taxes could be successfully questioned, from trying.
It is rather like looking at the FTSE 100 graph and concluding that economic growth ended on 1 December 1999. Indeed the performance of equity markets provides more evidence to support this assertion than average temperature data does for the idea that global warming ended in 1997. And yet we don’t see people queuing up to say that economic growth doesn’t exist. Could it be because there would be no profits to be made from doing so?
This is not a good platform from which to make grandiose statements like “the profession should also be seriously questioning the outcomes of unreliable climate models that have been produced by scientists who, by and large, do not have an actuary’s ability to see the bigger risk picture”. I think, on the contrary, actuaries generally take their data sets from a much narrower range of sources than climate scientists (another summary of the evidence on solar cycles in global climate change, as discussed by Brent Walker but this time drawing opposite conclusions can be found here). This is usually because we are working to tight timescales to deliver advice.
Brent Walker is right when he says that actuaries need to consider the implications of climate science in their work, but the current scientific consensus is that solar cycles are not the main driver of climate change. A better place to start in my view would be the Institute and Faculty of Actuaries report Resource constraints: sharing a finite world which points out that, either through natural depletion or the need to ration resources to mitigate climate change in the future, the primary challenge of climate change will be to manage within much stricter limits both in terms of the resources we can use and the level of economic growth we can expect. That really is something actuaries can contribute to.
The consultation on the future shape of workplace pensions has been going on for nearly a month now and ends two weeks on Friday. It is littered with errors, from completely repeated questions (Q52 = Q54) to ones which are so similar as makes no difference (Qs 41 and 44 for example) and the thrust of a lot of the questions are quite hard to answer if you do not share some of the underlying assumptions of the DWP about the process, but come on! This is our chance to put a bit of definition into the rather blurry outline of a straw man which some of the newspapers have been tilting at so vigorously!
You don’t have to answer all of the questions, but just to goad you a bit I have done so here. Agree, disagree, I would love to hear from you. But not until you have responded to one of the following addresses:
Pleasesendyourconsultationresponses,preferablybye-mail,to:definedambition.pensionsconsultation@dwp.gsi.gov.uk
Or by post to:
Defined Ambition Team
Private Pensions Policy and Analysis
1st Floor, Caxton House
6-12 Tothill Street
London
SW1H 9NA
There have only been 24 posts on the blog. I think the main reason for this was identified early in the process from a contributor referring to herself only as Hannah:
Thanks for this Hannah, we will look into this once the blog picks up pace.
DA Team, DWP
Of course the blog never did pick up pace because people soon realised that there comments would be lost in a stream of pension benefit queries. Not the way to encourage a consultation. If you want to comment on this or anything else about the process of the consultation, the contact details are as follows:
Elias Koufou
DWP Consultation Coordinator
2nd Floor
Caxton House
Tothill Street
London
SW1H 9NA
Phone: 020 7449 7439
The latest revelations from Edward Snowden that the US and UK agreed in 2007 to relax the rules governing the mobile phone and fax numbers, emails and IP addresses that the US National Security Agency (NSA) could hold onto (and extending the net to people not the original targets of their surveillance) has increased the pressure on the Government to tighten controls on the activities of the security services. This extension apparently allowed the NSA to venture up to three “hops” away from a person of interest, eg a friend of a friend of a friend on Facebook.
I have an issue with the Guardian analysis here. They say that three hops from a typical Facebook user would rope in 5 million people. However, using actual ratios from the network in their source (43 friends have 3,975 friends of friends have 1,328,361 friends of friends of friends) and the median number of friends of 99 from the original study, would lead to a number closer to 3 million. Still, it is clearly altogether too many people to be treated as guilty by association.
So it might seem like a strange time for me to be advocating that we give the Government more of our data.
The Office for National Statistics (ONS) is currently consulting on the form of the next census and the future of population statistics generally. The two options they have come down to are:
1. Keep the 2021 census pretty much as it was for 2011, although with perhaps slight changes to the questions and a greater push for people to complete them online; or
2. Using administrative data already held by the Government in its various departments to produce an annual estimate of the population in local areas. In addition there would be separate compulsory surveys of 1% and 4% of the population for checking the overall population figures and some of the sub-grouping respectively, and the ‘residents of “communal establishments” such as university halls of residence and military bases’ which are difficult to reach by other means.
In my response to the survey, I suggested that they do both, increase the compulsory surveys each year to 10% of the population and reduce the time between full censuses to 5 years. This is why.
First of all, everybody needs this data to be available. If the Government does not provide it, someone else will. Not by asking you overt questions, but by buying information about your buying preferences or search engine activities or any number of other transactions without your informed consent (eg you ticked agreement to their terms and conditions on their website) and without your knowledge. I would prefer to give my data to the ONS.
The ONS is part of the UK Statistics Authority, which is an independent body at arm’s length from government. It reports directly to Parliament rather than to Government Ministers and has a strong track record of challenging the Government’s misuse of statistics. With the exception of requests received for personal information (which are filtered off to become Subject Access Requests under the Data Protection Act), they have provided copies of all information disclosed by the ONS under the Freedom of Information Act on their website. In my view the ONS has demonstrated that it is a safe custodian of our data. They are everything the NSA is not: overt, apolitical and committed to the appropriate use of statistics.
But there are problems with the current data, which brings me onto my second point. Ten years is too long to wait for updated information. As the ONS points out in its consultation document, because of the ten year gap between censuses, the population growth resulting from expansion of the European Union in 2004 was not fully understood until 2012. There were other problems with the population data everyone had been working with before 2011, 30,000 fewer people in their 90s than expected for instance, which had serious implications for all involved in services to the elderly and those constructing mortality tables too.
So we do need more frequent census information. Five years seems about right to me, provided the annual updates can be made more rigorous. I think the ONS are right to suggest that they need to be compulsory to achieve this, but 5% of the population does not seem a large enough sample to be confident about this to me. I would prefer to see 10% completing annual surveys. This would allow 50% of the population to be covered over every 5 year census period, or 40% if the requirement was dropped in census year. There are many recent examples (see Schonberger and Cukier below) to suggest that the gains in accuracy due to increased coverage would be far greater than the losses due to the ‘messiness’ of incomplete responses.
There is a lot in the consultation document about the relative costs of the different options, but nothing about the commercial value of the data being collected. Indeed the reduction of the consultation to these two, to my mind, inadequate options seems to be very greatly influenced by the question of costs and the current cuts in budgets seen throughout the public sector. This seems to me to be very short-sighted.
However, I think this displays a failure of imagination. According to Viktor Mayer-Schonberger and Kenneth Cukier in their book Big Data, data is set to be the greatest source of wealth and economic growth looking forward. Many others agree. By taking a fully accountable and carefully controlled approach to licensing the data in its care, the ONS should be able to finance its own activities, even at the level I am suggesting, at the very least.
The ONS is very nervous about becoming more intrusive in its collection methods, citing the 35% increase in cost of the 2011 census in achieving the same level of response. It also refers to the response rates to its voluntary surveys which have dropped from around 80% 30 years ago to around 60% today. The main reasons for this in my view are the incessant requests from companies’ marketing departments masquerading as surveys on everything from phone usage to our views on banking to the relentless demands for feedback on every online purchase making us all subject to survey fatigue. This makes it all the more necessary that an organisation which is not trying to sell you anything and which is scrupulous about the protection of your data should be attempting to increase its scope and maintaining its position as the go to place for statistical data rather than falling behind its commercial rivals.
So let’s not fall into the trap of conflating all official data with the mountains of bitty fragments collected by our intelligence agencies from their shady sources. That has nothing to do with the proper, accountable collection of information to allow government and governed alike access to what they need to make better decisions.
So take part in the consultation, it matters. And when the time comes give the ONS your data. You know it makes census.
Now that the Great and Good of the actuarial profession and pensions industry have launched their joint consultation with the DWP on defined ambition (DA) options, it is interesting to look at the initial response in the print media.
The first thing to note is how little of it there is. The Daily Mail, Daily Express and Daily Telegraph have it on the front page. The Financial Times, Guardian and Times do not. Nor do the red tops. All three headlines sit alongside photographs of the Duchess of Cambridge.
And the response varies. The Express have written what looks like a positive piece (“Bigger Better Pensions For All”) until you discover it has decided to present the launch of the consultation as an “industry shake-up” which will “spell the end of annuities”. I was a little puzzled about this at first, as the consultation is not really about annuities at all, until I realised that Steve Webb had made a speech the previous day and mentioned the FCA review of annuities. This clearly fed into the default Express editorial line better than the actual topic of the consultation. This became clearer on page 4, with the headline “’Poor value’ annuity payouts are axed in pensions shake-up” next to a big picture of a smiling Ros Altmann. There appears to be only one story possible in the Express on pensions, whatever the actual news event.
The Mail does at least focus on things that are in the consultation, concentrating on the proposals to allow final salary pensions to drop some currently guaranteed elements of benefits such as indexation and spouses’ pensions. “The Death Knell for Widows’ Pensions” is their headline, but the article beneath is fairly balanced on flexible defined benefit (DB), quoting both those highlighting the reductions to benefits the proposal would allow on the one hand, and the danger that all the remaining horses would bolt from the DB stable if changes were not made on the other.
Finally, the Telegraph. “Pensions face new blow from ministers” is their headline. The article is similarly balanced, and is the only one to make the important point that benefits already accrued would be unaffected.
The coverage of the alternatives put up for consultation is patchy. Strangely the Express does best here, despite its desperation to make it a story about the death of the annuity, it does mention in passing collective defined contribution (DC) and guaranteed DC. Otherwise the focus is exclusively on flexible DB in both the Mail and Telegraph, and what members currently accruing non-flexible DB might lose as a result. The comparison with public sector pensions is made several times, with the Telegraph pointing out that the recent settlement on public sector pensions, which would not be removing the requirement to provide indexation and spouses’ pensions, was promised by ministers to be the last for 25 years.
So what kind of start does this represent for engaging the UK public in the debate on the future on pension provision? Mixed, I think. There will clearly be much more scrutiny on any legislative easing to current benefit guarantees than there will be to any addition of guarantees on pensions which currently have none. Perhaps this is to be expected. I do worry that cash balance may get squashed out as an option between the two camps of flexible DB and guaranteed DC – it is barely mentioned in the consultation, and can work well when coupled with a strong commitment to employee education like Morrisons have attempted.
But these are early days and the first thing everybody needs to do is respond to the consultation. Most pensions actuaries and many others will have strong views on many elements of it. So don’t leave it to your firm to do it on your behalf. The deadline is 19 December.
I recently attended a lecture given by Professor Raymond Hill on Mathematics and the Law. It focused on a number of cases where a misunderstanding of probability and statistics in particular had led jurors to acquit or convict in the teeth of the evidence presented, to prosecutors to construct cases which made no logical sense, to expert witnesses to mislead and for judges to misdirect juries.
One particular case he mentioned concerned the tragic death of two babies born to Sally Clark, a solicitor from Cheshire, within 2 years of each other. Sally was charged with the murder of both babies once the second had died. At her trial in November 1999, Professor Meadow, a paediatrician but clearly not a mathematician, claimed that, in this case, the chance of two babies dying from sudden infant death syndrome or cot death was 1 in 73 million. This figure came from a study of the deaths of all babies in five regions of England between 1993 and 1996, which estimated that the chance of a randomly chosen baby dying a cot death fell, if the child was from an affluent non-smoking family with the mother aged over 26 like Sally Clarke’s, from 1 in 1303 to 1 in 8543. Piling travesty upon travesty, the chance of Sally Clark suffering two cot deaths was then calculated as 1 in 8543 times 1 in 8543, which is where the 73 million figure comes from. Sally Clarke was convicted on the basis of this ludicrous kangaroo statistical “evidence” and spent over 3 years in jail and needed two appeals before she was finally cleared. A full account of the case, and how Professor Hill went about presenting the absurdity of it, can be found here.
As Blaise Pascal wrote: “You always admire what you really don’t understand.”
Mathematics and law can come into conflict for a number of reasons, but one thing that doesn’t help is that they share a lot of the same words. Proof, for instance. But where this means an immutable truth in mathematics, as true today as it was thousands of years ago and as it will be thousands hence, proof in law will depend on the time in which the trial takes place and the burden of proof required. When there was the threat that Syria would be bombed by the UK and US, some opponents used the idea that you shouldn’t pass a death sentence on whoever would be standing under the bombs unless the Syrian regime had used chemical weapons “beyond reasonable doubt”. I saw one estimate of this as an 80% probability, however I have since seen 99% probability presented as a definition. So proof in law is a more elastic concept.
As a pensions actuary, I have had my own, rather different, problems with the interaction of mathematics and law. Defined benefit pension schemes are mathematical constructs as well as legal constructs. If you do A and B and earn C, then the pension scheme to which you belong should deliver benefits to you of D. However a pensions lawyer would see it rather differently, in terms of obligations of certain parties towards other parties under the legal construct of a trust.
When drafting pension scheme rules, lawyers often have to set up quite complex conditional relationships between possible events and outcomes. It is quite possible for some of these to be left out (in which case we hear that “the trust deed and rules are silent”), and also for them to be included but in a way which displays a certain amount of ignorance of mathematical logic, meaning either that the rules are very difficult to implement or have unintended consequences. This generally then creates work for a different set of lawyers down the track.
As a result, actuaries have long accepted that trying to interpret the rules of any pension scheme without legal advice is just asking for trouble. And the list of legal disclaimers actuaries populate their reports with grows year on year as a new threat of future second guessing emerges. There is therefore certainly considerable respect for the importance of the legal elements of the construct of a pension scheme by actuaries, if not always full understanding. Unfortunately, the same does not always hold in reverse. I have seen numerous examples of rules drafted without the mathematical elements of the construct fully taken into account by the drafters:
Actuarial input into any issue around a pension scheme is frequently dismissed by lawyers as “crunching the numbers”. I think most of them would be mortally offended if an actuary turned to them and asked them to crunch the words.
Pensions lawyers and actuaries need each other if pension schemes are going to work properly. And they need to understand each other rather better too.
It looks very strange from the outside looking in.
INEOS, the 3rd largest independent global chemical company is seeking to recruit highly motivated technicians, the advert read, posted only 3 weeks ago on 30 September.
These posts are based at our sites at Grangemouth, INEOS’ largest asset which includes Scotland’s only crude oil refinery and Finnart on Loch Long. This is an exciting time to join us: we are fully committed to our business in Scotland and are looking to develop our technology business globally.
…Successful candidates will receive an extremely competitive salary including shift allowance and benefits package including a competitive pension scheme.
Cut to yesterday when the chairman of INEOS Grangemouth announced that the workers had to accept the company’s survival plan or the plant would close, as they were losing £150 million a year and had a pensions deficit of £200 million. Today Unite said around 680 of the site’s 1,370-strong workforce had rejected the company’s proposals, which include a pay freeze for 2014-16, removal of a bonus up to 2016, a reduced shift allowance and replacement of the final salary pension scheme with a money purchase scheme. INEOS responded by confirming the closure of the petrochemical operation at Grangemouth.
It was in 2008 that INEOS originally took the decision to close the company’s final salary pension scheme to new employees due to the costs associated with its continued operation. Following a strike organised by Unite, the company relented following various interventions including by the then President of the Faculty of Actuaries, Stewart Ritchie, keeping the scheme open to new employees in exchange for a 2% employee contribution. Unite made, and then withdrew, a claim that INEOS had asset-stripped the Grangemouth refinery business which had been spun off from BP in 2006. It also claimed that workers at Grangemouth were paid £6,000 less than workers at other similar facilities. One estimate was that the average salary at Grangemouth was £40,000 per year at the time.
Assuming the average has increased to, say, £50,000, that would represent a total wage bill now of around £70 million a year, based on a total workforce of around 1,400. The proposals on increases and bonuses would therefore look inadequate to make much impact on losses of £150 million a year. The pension changes may be more significant (the company estimates pension costs are currently 65% of salaries, although a large part of this is likely to be payments on the deficit which would be likely to remain after any restructure).
However, things are not what they seem. The £150 million pa quoted by the company is negative cashflows rather than losses. The company’s is investing £150 million more than the profits it makes each year at Grangemouth. The refinery is expected to make a profit in 2013.
Atleast it was. INEOS had warned that unless the survival plan were accepted, it would close half of the plant in four years’ time. The action to permanently close the petrochemical plant and not to reopen the refinery while they felt there was still a “threat of strike action” therefore represents a pre-emptive strike by the company, after Unite had agreed to call off strike action last week. The three day stoppage in 2008 was said to have cost the UK economy at least £100 million.
And the strangeness does not stop there. There is another dispute going on alongside the economic one. Unite originally threatened industrial action in July over the suspension of Stevie Deans, a Unite official allegedly involved in the selection of a Labour parliamentary candidate in Falkirk, who was subsequently reinstated and cleared by the Labour Party’s internal investigation. Dean is currently being investigated by an undisclosed third party on behalf of INEOS for allegedly using his position to recruit staff to the constituency party, with the investigation due to conclude on Friday. It is not clear where the announcements today leave this investigation.
If the petrochemical plant is to go into insolvency, possibly followed by the closure of the rest of the site, the next question for the workers after the loss of their salaries will be what is to happen to their pensions if INEOS sell up. To paraphrase Lynyrd Skynyrd, there are definitely things going on that we don’t know here.
I applaud the use of an open blog but it’s obvious that there’s a bit of a problem here! Perhaps, to avoid this becoming sidetracked, you could introduce a drop-down in the comment section so that people could select what aspect of DA reform or the consultation their comment relates to – and if their comment relates instead to concerns about their accrued benefits, you could redirect them to a separate specialised member queries page?