When I start a new novel, I find it important to have a visual picture of the final scene. It is literally an image in my mind of the denouement. I may not know who is alive or dead, or even the exact fate of the main protagonists who have accompanied me in my novels to date, but I find this helps create the tension I need to write.
Sometimes, I don’t even know whether the killer worked alone, was manipulated, or part of a wider, sinister plot that only reveals itself as the crime story progresses. But, for me, the final scene is always clear. In contrast, if I were to create a “whodunit” around the fate of defined benefit (DB), it is the opening image that suggests itself. In the vicinity of the victim, there would be a lively collection of usual suspects: the stolid bureaucrat hiding a heavy tax policy; quick-talking accountants and their vaguely predatory demands; a dysfunctional and not entirely innocent industry value chain; plus the seductive charms of uncorrelated assets.
As police recreate events, suspicion would even fall on those who cared most about DB: the trustees that tried to protect against the onslaught – did they do enough? And I write that as someone who has been a trustee and appreciates how demanding the position can be. Yet, as I ponder the motives, desires and actions of each character, it is hard to be clear where guilt should lie in this puzzling case, or if – as in
Murder on the Orient Express – it should be shared across all parties.
Amin Rajanis a veteran industry investigator, known for the CREATE-Research global pension fund surveys. With the latest survey of defined benefit and defined contribution (DC) schemes just released, under the title
Investment innovations: raising the bar, I put the question of responsibility to him. Rajan sees the case as a two-act tragedy. In the first act, set in the 1990s, DB was lured down a blind alley where a raucous equities party was in full swing.
Arriving late, DB was swept up by the festivities and relaxed his guard in an environment where it is best to remain wary. When the mood turned ugly in 2000-2002, as it inevitably does at such occasions, DB was savaged by a rampant bear. Substantially lighter in pocket and severely injured, but refusing to admit it, DB escaped the aftermath of the equities party and fell into the arms of uncorrelated assets.
She seemed to promise the world, or at the least a way out of the darkening cul-de-sac, but she proved fickle. By the time DB met uncorrelated assets in the second act, her peak returns were history and DB was one of many suitors left disappointed. Even worse, during the dalliance, the equities party revived and proved profitable for all involved, but DB missed out.
What occurred next can only be speculated, but there is evidence of attempted mark-to-market strangulation. In any case, DB sustained life-threatening injuries and was eventually found beaten down in an alley doorway after the global financial crisis. If DB passes away, coroners could struggle to identify the cause of death. “I suppose I would categorize it as death by a thousand cuts, but who was the perpetrator? Or was it, somewhat bizarrely, self-inflicted?” reflects Rajan.
Keeping defined benefits alive
Without wishing to overstretch the crime novel metaphor, it is essential to examine
the fate of DB. The simple fact is that DB is still alive and breathing, and providing dependable retirement incomes for millions of citizens in many countries across the world, despite the sustained challenges of a hostile environment.
Trustees dedicate enormous time and care to their responsibilities; the asset management and consulting industry as a whole constantly seek to find solutions that will keep the patient alive; regulators are well meaning in their attempts to “improve” retirement provision. And yet there is no denying that DB as an approach to retirement funding is declining.
PLANSPONSOR reported in May 2011 that up to 60% of US corporate DB plans are closed to new hires, while 30% are “frozen” so members no longer accrue benefits. Approximately 3% of plans are actively being terminated, and this seems a growing trend.
In 2007, IBM, faced with pension liabilities estimated at $7.4 billion at the end of 2004, restructured its pension plan. The company took the balance of its portfolio, distributed it amongst members and topped it up with sweeteners such as a dollar-for-dollar match for 401(k) accounts up to 6%. Now that resulting lawsuits largely appear settled, other companies are looking to follow. “I believe we will also see companies follow the US trend of terminating their funds. It is certainly much talked about in the UK, although formidable legal obstacles remain,” comments Rajan. Globally, he estimates pension assets at $25 trillion, of which some $14 trillion are in DB plans. So, while DB remains significant in size, its relative share will continue to decline due to the effect of changes in the benefit structure and the continuing switch to DC plans.
It is piecemeal and messy, and subject to lawsuits, but essential Amin Rajan
The near-zero interest rate governments adopted after the financial crisis only inflated liabilities. Overall, asset values dropped 25-40% in 2008 and funding levels plunged from an average of 105% to 75%. In some cases they fell as low as 35%, which would require 80-year recovery periods. By the end of this decade, Rajan concludes DB plans may only be the preserve of the public sector, but notes even these face significant challenges.
The unfunded liabilities of individual state pension funds in the US amount to $2.5 trillion. “Pensions laden with ‘spiked’ promises have helped financially crippled states like Illinois, California and Connecticut. Many are renegotiating benefits, for example, to introduce a pension based on career average salary. It is piecemeal and messy, and subject to lawsuits, but essential,” explains Rajan.
DB is suffering most dramatically in the US, Canada, the UK and Ireland, according to Rajan. He believes the tale of DB is a cautionary one. It shows promises are easy to make, but extremely difficult to keep – even with the best will in the world – over a long-term horizon. As to the case, if
DB passes away, will it be a matter of homicide, manslaughter or death by misadventure? I think the jury is still out on that. However, my own personal belief is that DB, at least within Europe, will receive its final mortal blow if an equivalent of Solvency II is introduced for pensions. I hope the threat can be stayed.