The UK occupational pensions industry has seen a dramatic shift over the past ten years towards insured contracts. This shift is remarkable not just in its scale but in the lack of comment that has surrounded it.
The incursion of the insured trustee investment plan (TIP) has been regarded by pension purists with as much relish as the spread of Japanese Knotweed but whereas Knotweed has little going for it, the TIP has had a positive impact,primarily in the restructuring of unbundled occupation DC plans but increasingly in the management of pooled funds for smaller DB arrangements.
If you are a member of a workplace DC pension, the chances are you are invested in a passive fund insured by Standard Life, Scottish Widows, Zurich, the Prudential or one of the other major UK pension providers (known now by the FSA as “operators”). Although your contract of assurance will be with one of these household names, the assets will be managed by Legal and General, BlackRock ( BGI) or (more rarely) by State Street using an insured or “pooled” fund offered by one of these passive houses. If you are invested actively your contract won’t be directly with Newton or Gartmore or Schroders but through a Provider’s version of that fund established under a reinsurance treaty.
The reason you invest in a reinsured version of an asset manager’s insured or pooled fund is because your personal pension or the trustee’s occupational pension invests in a single policy of assurance known to the insurers as a TIP which offers access to a wide range of fund managers which are “wrapped” by the TIP structure. This is known by insurers as a “corporate wrap” but is no more than a replication of the individual wrap accounts offered to retail customers (the “corporate” really referring to the institutional status of the underlying funds involved)
The reasons purists see these TIPs or Corporate Wraps as a nuisance is that they a means by which insurance companies regain control of many of the functions that make purists a living- namely the manager and fund selection functions, the investment administration function and the ongoing fund governance function. Put bluntly, the spread of TIPS is a means of outsourcing much of what consultants and third-party administrators have been doing for the past twenty years and its small wonder that this is not viewed with great pleasure by said consultants and administrators.
You might be asking yourself why such outsourcing is necessary. The answer is quite simple and lies in the word “scale”. Not so long ago (right up to the late 1980s) the vast majority of workplace pensions were fully insured using the with-profits funds of the big UK life insurers. The consultancies successfully argued that these arrangements might give economies of scale but were so hopelessly inefficient and untransparent that trustees were better off investing directly with fund managers and administrating these unbundled funds using in-house administration or specialist third-party administrators. Consultants became the arbiters of the fund management choice which spawned the manager research functions of which we are all familiar.
This worked fine so long as Pension Schemes were solvent and had little impact on the corporate balance sheet. Unbundling pervaded occupational DC and even some AVC contracts became “self-administered” arrangements. Insurance companies were effectively driven our of the workplace saving market.
The introduction of personal pensions in 1987, where the employer could pay into an individual policy was the first way back for the insurers. To begin with, the attrition rate was slow, the “grouped” personal pension was very much the poor relation to the occupational scheme but as the costs of Defined Benefit arrangements begun to be scrutinised and the benefits of transferring not just risk but also operating costs onto the member began to dawn on sponsors, group personal pensions became more and more commonplace. The stakeholder consultations of the late 90s were primarily in recognition that there was no regulation on the governance or operating costs of personal pensions.
When insurers were forced to operate with price controls, many woke up to the need to provide services so corporate sponsors much more efficiently. With price controls in place, group personal pensions, now touted as group stakeholder pensions had become more acceptable to the larger employer. In response the larger consultancies set up research departments to review the merits of one provider’s offerings over another. This led to a quick consolidation of personal pension providers operating at the top end of the market. Insurers, keen to tout new systems and processes were persuaded by the market to abandon the with-profits approach (which didn’t sit happily within a price cap) and concentrate on uni-linked business. The insurers had for some time been divesting themselves of their in-house fund managers (Threadneedle had been set up by Eagle Star and Allied Dunbar in 1994 and started a trend of dedicated fund managers established at arms length from the parent insurer). Without an integrated investment proposition, insurers were much more ready to offer fund management services from managers outside the group.
Consultants increasingly concentrated on those insurers who would “embrace open architecture”- eg offer externally managed funds and insurers turned their attention to providing multiple funds of multiple manages. It was at this point that the infrastructure of the TIP took on its own energy.
The insurers discovered that by aggregating funds from a large number of personal pensions (typically grouped) they could get terms from the fund managers which were considerably below those offered to individual occupational schemes. They could effectively provide their reinsured versions of the underlying funds as cheaply as the managers could directly. The insurers had taken great strides in the servicing of their group personal pensions and cold now offer the TIP as an alternative to the unbundled occupational DC plan with considerably greater efficiency.
Much to the dismay of consultants and administrators operating in the “unbundled DC space”, the TIP has now taken over as the primary funds delivery vehicle for all but a few large occupational DC plans, indeed many such schemes have handed back the member record keeping of their schemes to the very organisations that originally ran their pensions in the 70s and 80s- namely the large insurers.
Attacked on one side by the group personal pension and on the other by the insured TIP, the unbundled DC plan now looks an endangered species.
The last bastion for the unbundled scheme remains the Defined Benefit Plan, the vast majority of which are themselves in run-off but even here the inexorable creep of insurance company TIPs is evident. The functionality that insurers introduced as part of their modernisation of personal pensions included the concept ofLifestyling which is effectively “DC Liability Driven investment”. Lifestyling operates on a series of triggers which moves a member’s funds into more appropriate assets in preparation for annuitisation. Since this is the same “end-game” as that planned for most DB Schemes, it seems logical that insurers (who ar the insurers of last resort for the buy-out of DB plans, should be employing their lifestyle technologies to administer LDI end-game strategies for DB plans.
With the capacity to offer full open architecture pretty well unconstrained since the relaxation of rules governing the assets held within insured contracts (permitted-l links), the way is now open for insurers to reassert their hegemony of the asset management of most DB plans. This “creep” will not extend immediately to the larger DB plans which will still benefit – because of their scale- from the more precise solutions offered through segregated or bespoke fund solutions administered by specialist administrators with assets held by specialist custodians. For such schemes there is a need for skills outside the scope of the UK Life Insurance industry.
However, for smaller DB plans, eg those with assets of less than £250m, the future looks like insured TIPs. We have already seen certain progressive insurers marching into this space. Some consultants- notably Redington, have begun to establish relationships with the consultants and administrators of small DB plans (the tie-up of Redington and Bluefin being an example). Bluefin are themselves owned by an insurer-AXA and it is the AXA TIP that will be used to provide a Redington-lite service to such plans. We can look forward to more of the LDI focussed consultants looking to expand their client base by delivering the analytics for succesful DB de-risking through such partnerships and with the use of the ubiquitous TIP.
So we have come full circle. The workplace pension is once again an insured pension. We have moved from with-profits to open architecture TIPS but it is the insurer’s balance sheets that carry the majority of DB assets and will ultimately manage the private pensions of UK plc.