Blog: A heated debate

This year’s Law Debenture Debate, held in the opulent Institute of Civil Engineers in Westminster, raised the question of whether pension funds should be treated like insurance funds- essentially, the much feared European Union proposal to extend Solvency II.

Former Conservative defence secretary turned TV documentary maker Michael Portillo chaired the debate, guiding proceedings with humour and unobtrusive discipline.    

Bob Scott, a senior partner at Lane Clark Peacock, proposed the motion. He established the mantra his side would repeat many times throughout the evening – “security, simplicity and trust.” He asked the audience to imagine a utopia where pension funds had always been treated like insurance funds. He argued that this would remove the need for the Pensions Regulator (TPR) and the Pension Protection Fund (PPF), and a tax system so complex it had to be simplified in 2006. He pointed out the incoherence of the UK legislating in 1988 to make pensions voluntary, and then in 2011 to make them compulsory.

Referring to Orwell’s seminal work he then said that 1984 was a landmark year in pensions. This was because legislation was introduced to require schemes to revalue for early leavers; the FTSE 100 index was launched (of which only 21 of the original companies remain) and the Association of Pension Lawyers was founded - he claimed these were the only people who benefited from the complexity of the current system. He concluded by asserting that “pension funds should have enough to pay beneficiaries”, they should be “separate”, “trustees shouldn’t gamble”, and “employers shouldn’t promise to make payments if they can’t afford it.”

Ian Pittaway, senior partner at Sackers, was the first to speak against the motion. He argued that “imposing too much security may suffocate and damage”. He thought that the current balance was “just about right” and it would be tipped too far by the requirement of higher funding and more complex regulation. He pointed out that solvent companies are already required to stand by their obligations and provide the full buyout cost. He said pension schemes were better protected by a “funded PPF backed by British Industry” than by unfunded insurance, and finished by stating that “overregulation kills pension schemes.”

David Collinson, co-head of business origination at the Pension Corporation, said that pension funds needed a management approach which reflected the state of assets and liabilities. the alternative that the alternative had “already failed pensioners.”

He claimed that they were over £500bn short of being able to provide an insurance level guarantee, which he praised as “clear on what can be guaranteed” and “honest about what pensioners can reasonably expect”. He described this as a “disciplined approach to measuring, managing, mitigating and taking risks” and advocated full representation on pensions bodies because it was unfair to expect lay trustees to be jointly liable. He criticised the pension fund system as “vastly inefficient” before repeating the refrain of “security, simplicity and trust.”

Mike Weston, head of investment at DMGT pensions, began by repeating the £600bn figure representing the JP Morgan estimate of the cost to pension schemes if Solvency II were to come into force for them. He suspected that the directive was borne out of a “desire to enhance profits amongst European life insurance” and a misguided “belief that any level playing field across Europe would be good for economic growth and job creation.” UK pension capital was permanent whereas European insurance capital was not, he said, adding that his own scheme’s deficit would rise by around 30% if these measures were implemented, meaning they would “lose money that could have been invested in equity”, and would likely close as a result.     

Punter Southall’s CEO Jonathan Punter was the last speaker for the motion. He said it promoted the “noble aspirations” of “security, simplicity, trust, honesty and transparency.” He claimed that, under the current system, there had been a “series of problems relating to the mis-pricing of risk” exacerbated by “weak regulatory oversight” and “lack of transparency.” He described the “pensions crisis” as “morally offensive and economically untenable”, and said the similarities between insurance and pensions funds were “stronger than the differences”. 

Goldman Sachs head of UK and Irish institutional investment Paul Craven was the final speaker. He argued that “pension funds should be allowed to invest” so they can take advantage of “long term investment opportunities.” He said they needed to be able to “invest in growth assets” in a way which Solvency II does not allow, and pension funds currently hold more growth assets compared with the 10% maximum in European insurance funds. He claimed this would “take away a useful source of return” and “make it harder to reduce the deficit” and warned against “being a pessimist when it comes to asset allocation.” He said the “historical data” showed that in long term investments equity would outperform bonds 99% of the time. He said to treat pension funds like insurance funds would be “betting against all the evidence” and said that they “need asset growth over the long term.”

The contributions from the floor indicated a firm bias against the motion. Unsurprisingly, the initial vote showed that 23% were in favour of the motion and 77% were against. This shifted minutely after the debate – to 24% and 76% - a result Collinson at least clearly viewed as a triumph.