A quarter century of pensions

25 years ago today, I walked through the doors of Bacon & Woodrow in St Albans for the first time: (relatively) fresh faced, (relatively) bright eyed and (relatively) eager to learn about the world of pensions, of which I knew just about enough to get me through a job interview (some would say that hasn’t changed much).

Exams back then were A to H and Q (obviously), valuations had to be run overnight, sometimes using data typed in manually from index cards. Transfer calculations were done by hand by actuarial students, while we still had to deal with the fallout from personal pension mis-selling. Actuaries were bound by a raft of guidance notes that perhaps seemed designed more for actuaries than their clients.

Benefits were bounded on one side by the RST and on the other by the rubric of IR12 (dynamised final remuneration, anyone? Or the 1987-89 lump sum calculation?).

Some pension schemes at the time seemed to be in rude health (or so they thought), plump with equities, riding high in the tech boom, and using the magic of actuarial values. Inflation had been falling since the early 1990s and gilt yields were at historically low levels, though most actuaries were sure yields would have to rise.

Back then we had to test whether schemes had surpluses that were too big, that would have to be spent on benefit improvements or refunded to the employer if the scheme wanted to keep its tax exemptions.

Pension schemes largely ran in their own bubble, and no-one really thought about the employer covenant (until it failed). Pension scheme buy-outs weren’t unheard of, but were unusual.

Under the surface, all was not well: as soon became clear (not the millennium bug, which was pretty anticlimactic, all told).

Schemes were having to adapt to new minimum funding standards (MFR) and a new regulator (OPRA), introduced after the Maxwell scandal a few years before. They had lost tax relief on equity dividends and were having to provide guaranteed inflation protection for members, in many cases for the first time. Some employers (including my own) had already decided to close their DB schemes and move to DC. As we would soon find out, actuarial techniques of the day made it hard to see what risks were being taken.

Exley, Mehta and Smith had published their seminal paper the year before, shaking the foundations of accepted actuarial thought. Dark murmurings were starting that people were living a lot longer than the old PA90 tables would suggest. FRED20 was about to rear its head.

But worse was to come. With the turn of the millennium, the tech bubble would burst and we’d enter the first of a succession of financial crises. As good times turned to bad, we’d find that the MFR and OPRA were paper tigers: the protection they gave illusory.

As I look back now, there is a strange circularity in the tale. After two decades of deficits, funding has improved. Schemes worry again about what to do with surpluses. The insurer with whom I did my first buy-out deal is back in the market, after years away. Gilt yields are back to the levels we saw in the late 1990s.

There has been a lot of pain along the way. Too many people have lost benefits. Companies spent years and billions, playing Alice, chasing deficits that only seemed to get bigger. DB schemes closed, replaced with DC schemes that will struggle to give today’s employees the same security in retirement as the generation before.

Some changes have been decidedly double-edged: simplification of tax rules was needed, but has embedded inequities between DB and DC employees. Members have more flexibility in when and how they take their benefits, but find it hard to access appropriate individual advice.

But, through all the pain, the pensions world today is, in many ways, stronger now than it was back then. The surpluses of 2023 are much more real and more likely to endure than the surpluses of the 1990s. Auto-enrolment has opened up pensions to more people than ever before (even if contribution levels could be improved). We have a much better understanding of how to manage the strengths and limitations of employer covenants. Trustees and companies have an ever growing list of options available, whether through insurance, investment, superfunds or capital-backed solutions. We have a safety net to soften the blow for members if their company fails, backed by a regulator with real teeth.

There are many things I miss about the 1990s. I definitely miss having knees that don’t hurt in the rain, and I’m really not convinced by what passes for music these days. But, for my money, I'd take the pension world of 2023 over the world of 1998 any day.