Defined benefit pensions

John Towner has posted an excellent article (HT: Moyeen Islam) suggesting that the BHS collapse is a bellweather for the rest of the defined benefit pension world. I agree.

As he points out,

In their inquiry into BHS, Parliament will surely ask tough questions: how did this happen, where was the Regulator, what were the trustees thinking, what were the Scheme Actuary, the auditor and other advisors saying? These are important questions, but I also hope that the inquiry will probe what changes can be made in the pensions industry to avoid this situation being repeated and ensure that the estimate of another 1,000 pension schemes entering the PPF does not become a reality.

The situation with BHS highlights a couple of the ethical challenges around pension funds.

One is that oversight is hard. It seems obvious that investors should not have been able to strip cash from a business with crushing pension liabilities. But it didn’t happen in a vaccuum. Pensions are highly regulated, company boards have obligations beyond their shareholders, and BHS’s financial situation was publicly visible. It doesn’t seem plausible that a trivial solution will prevent similar things happening again (although the suggestions in the article seem sensible steps).

The second is that our society is still unwilling to face up to the ethical challenge of the unaffordability of the previous generation’s pension arrangements. People contributed to defined benefit pensions in good faith, and not unreasonably expect the obligations to them to be met. But demographic changes (and inherently generous final salary arrangements) have meant that the entire defined benefit system needs to change. It’s not clear who should pay, but it is not obvious to me that pension scheme contributors are entitled to be paid out in full by a system they in aggregate constructed on flawed in assumptions. The problem is that very few individuals could have realised how flawed their system was, and so on the flip side it seems unfair to penalise some for the sins of an elite few.