Financial Markets: Stability

Lord Davies of Brixton Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I first offer my thanks to the noble Lord, Lord Sharkey, for initiating this debate, and to the previous speakers. I have to declare an interest as a fellow of the Institute and Faculty of Actuaries. I have to say, based on over 40 years in the world of pensions, I find it quite difficult to cram what I want to say into five minutes—less than five minutes now.

I will, however, make three points. First, thanks to the noble Baroness, Lady Bowles of Berkhamsted, we have heard a clear exposition of the technical difficulties that arose in the episode in September. We need to understand, however, that this is a systemic problem with our pension system and the way that it is funded. It is not just a question of overleverage or pooled funds being difficult to manage. It is about the whole approach to how we fund defined-benefit pensions. There is a mistaken belief that if you look to reduce short-term volatility, that in some sense helps in the long term. The contrary is true: the real risk to pension funds is that they do not deliver their benefits, or the obverse, which is that the cost of providing those benefits is set too high, dissuading us from making adequate provision. It is a complicated subject, but this is encapsulated by this short-termism and focus on mark-to-market valuation at the behest of company accounts. That is the fundamental problem and it needs to be broken.

To address that issue, we must have a proper review of this incident and what it means for funding in general. Currently, we have an alphabet soup of regulators involved: there is the Joint Forum on Actuarial Regulation; within that we have the Institute and Faculty of Actuaries, the Financial Conduct Authority and the Pensions Regulator—it goes on. They are undertaking a review next month of what happened but we need an important and clear independent element in that review. I pressed the issue in Questions earlier in the week: I hope that the Treasury will take a more long-term view of what is happening here. We are told that three Select Committees are looking at this issue. Perhaps we will have to wait until their conclusions, but the Treasury has to take hold of this issue and look at what needs to be done, rather than relying on this alphabet soup of regulators.

Thirdly, what impact does this have on pension benefits? A lot of commentators in the industry have said that funding ratios have gone up, so it is all right. As has been explained, ratios have gone up not because there is more money—there is less money—but because of the adjustment in the value attributed to future liabilities. That is fine, but the problem is that the better funding ratio is not looking at what that means for benefits. The funding ratio might have improved, but the higher rate of inflation that comes with that reduction in interest rates will have a devastating effect on members’ future benefits. It is no good having a higher funding ratio if the benefits have, effectively, been reduced because of the impact of inflation.

Defined Benefit Pension Funds

Lord Davies of Brixton Excerpts

Tuesday 1st November 2022 Lords Chamber

[Baroness Penn (Con)]

My Lords, the Government do not agree with the noble Baroness’s assessment of the situation. Along with the Bank of England and the Financial Policy Committee, we keep a close eye on identifying and addressing systemic risks to improve UK financial stability. In 2018, the committee specifically looked at UK pension schemes’ resilience to an instantaneous 100 basis point rise in yields across maturities. The movements that we saw a few weeks ago were greater than that. As the FPC has also noted, it may not be reasonable to expect market participants to insure against all extreme market outcomes, because there can be negative effects to that as well.

[Lord Davies of Brixton (Lab)]

My Lords, I declare an interest as a fellow of the Institute of Actuaries. I am afraid that there will be an alliance of regulators and providers who will say, “Nothing to see here, we can move on”. There are questions to be answered about what damage has been done and about what we can do to ensure that it does not happen again. There is so much hidden in the investment policies of pension funds. Can the Government give an assurance that there will be a proper investigation of what happened, with an independent element?

[Baroness Penn (Con)]

My Lords, the Pensions Regulator and other regulators have said that they will want to look at what has happened and learn lessons. I also understand that the Work and Pensions Committee in the Commons is looking at this issue, including any changes to the Pensions Regulator, for example, that may need to be made. The Government look forward to reading the results of its findings.