Editor's blog: The House of Lords has taken up a noble cause in trying to preserve the quality benefits provided to workers in key public services, but presenting increased investment risk as a magic solution is disingenuous.

You can read more about it here, but the essence of the amendment is that “schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, are treated differently from schemes that are not”.

The move has been characterised by its supporting peers and lobbyists as a vital step to check the Pensions Regulator’s oppressive forcing of derisking out of equities and the real economy into low-yielding gilts.

“Without any upside potential for a diversified investment strategy that can take advantage of the wide range of investment options available from infrastructure assets, building housing for rental and other areas… schemes such as RPMI [the Railways Pension Scheme] would require such significant contribution increases that members could not afford it and would opt out, and employers could probably not afford it either,” Ros Altmann, Conservative member, told the Lords.

A relaxation of this regime necessarily involves an increased risk to the Pension Protection Fund and its levy-payers — something that was conspicuous by its absence from the Lords debate.

That lower-risk investment strategies demand increased contributions for employers and members, and ultimately tend to lead to scheme closures, is undeniably true.

But the arguments put forward by peers seemed to naively suggest that taking risk has no drawbacks for members, sponsors or the system as a whole.

How resilient are remaining DB sponsors?

The Lords behind the amendment seem to be arguing that since higher-risk investments like equities always outperform bonds over the long term — something even stockpicker supreme Terry Smith has questioned in the past ­— drawdowns will only ever be temporary, and are able to be recovered over time.

“An open scheme is open at both ends. It has no end date and is open to new members, providing a continuing supply of new contributions, including from future members,” said Liberal Democrat peer Sharon Bowles.

“Cash flow is steady state or positive, giving inherent liquidity and allowing assets to be used to generate returns.”

This is one of those statements that is true until it is not. Lady Bowles implies that DB schemes will simply go on forever, with their sponsors remaining intact and continuing to hire as many new members into the scheme as leave it and draw a pension from it.

A cursory glance at the state of many sectors following the coronavirus crisis confirms that we cannot rely on Britain’s historic industries to be around forever. As far as pensions are concerned, this is arguably true even in those sectors that provide a public service, as evidenced by the government’s vehement refusal to stand behind risk in the railways scheme.

How would TPR respond?

As it is, it is far from clear how the amendment will actually force the regulator to change its approach. As several commentators noted in response to our reporting, TPR does not force derisking per se — it merely asks sponsors to provide mitigations that ensure they can stand behind their bets.

A relaxation of this regime necessarily involves an increased risk to the Pension Protection Fund and its levy-payers — something that was conspicuous by its absence from the Lords debate.

None of this is to detract from the noble aim of the Lords — to preserve high-quality benefits for key workers in the UK. If they feel that a slight increase in the risk of things going wrong is a tolerable cost for the provision of better pensions to the majority, they should say so.

But to discuss increased investment risk as a magic solution to the DB problem without consequences is disingenuous, and does the key workers they seek to protect a disservice.

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