Editorial: The importance of understanding pensions is well acknowledged by the industry. The need for guidance and advice is a ready source of commentary at any time of year, and the dangers faced by those approaching retirement without sufficient education are rightly the subject of much debate.
But there is another group that is seriously lacking a decent understanding of pensions, though not for an absence of interest; namely, investors and shareholders in UK companies.
A new report released on Monday will outline the challenges faced by investors. In short, there is little information provided by companies on their defined benefit schemes, and what is given is of questionable use.
Anyone who reads Pensions Expert will know IAS19 does not give a comprehensive view of a scheme’s financial position. Most people don’t understand this, and lacking any other measure by which to judge the effect of a scheme on its sponsor, may misjudge the danger posed by a scheme. Someone might see a large or growing accounting deficit and be put off, not realising the same scheme has a healthier technical provisions funding level, a contingent asset arrangement or an investment strategy with nothing invested in corporate bonds.
Illustration by Ben Jennings
The more DB schemes are allowed to be represented as unwieldy burdens on the employer, the louder and more convincing the cries to allow companies to reduce their commitments becomes. Keeping people in the dark about pensions does no favours for schemes.
Speaking from personal experience, some companies are willing, even eager to discuss their schemes. However, many are reluctant. Often even reaching the scheme itself is impossible, and you are instead bounced between public relations and investor relations firms who seem not to believe pension funding information is material to investors.
We cannot rely on the good grace of companies willing to discuss the risks in their schemes. Allowing them to choose what they reveal incentivises them only to talk when things are going well. That is generally not when information is most useful.
