“Too prudent for its own good” – how under-risking DB schemes causes new problems.Full steam ahead

It’s a fair question for a blogger to ask. I don’t have the answer and suspect that you’d get a different reply depending on who you asked.

Here are the facts

According to Hymans Robertson ,

The total value of buy-out and buy-in deals struck in H2 2016 was around £7.6 billion (around £10.2 billion for the year to 31 December 2016) and there were two longevity swaps in H1 2017 covering £1.1 billion of liabilities. Forty two deals, covering liabilities worth over £65 billion, have been completed since 30 June 2009.

These figures are confirmed by LCP

LCP Pension De-Risking 2018

Meanwhile, the levels of “voluntary buy-out”, or personal transfers, has rocketed.

These are the figures published by the Office of National Statistics last week

MQ5 (22nd March)

Not only are “voluntary buy-outs” three times up on 2016 levels, they are now three times higher than the much more expensive insured buy-outs and buy-ins.

Why so quiet?

DIY de-risking is gutting the active and deferred membership of some schemes; I quote Barclays £4.2bn, LBG c£3bn and BSPS (just under £3bn) – all 2017 transfers.

As the discount rates for voluntary transfer value is a “best estimate” figure, well below the buy-out cost, the beneficial impact on scheme funding of this mass migration is much more than the bare numbers suggest.

The £34.245 bn number at the bottom right hand corner of the ONS table is truly astonishing. I have written in a recent blog about what lies behind this mass desertion. I do not think it is about pension freedoms (we’ve had these a number of years), nor do I think there are conspicuously higher CETVs in 2017 over 2016, I see the explosion in transfers as being all about IFAs and other advisers getting their shit together. I have explained this in a recent blog – it’s got everything to do with contingent charging.

Old Mutual reported that 20% of all new money arriving on its commoditised SIPP platform came from CETVs, the recent hikes in new business at SJP, Royal London and especially Prudential suggest that for all the noise about institutional de-risking, the real heavy lifting’s taking place in the voluntary sector.

Here’s why these are numbers nobody wants to talk about…

1. No fiduciary controls;  trustees can control the buy-out and buy-in of insurers- targeting the populations whose benefit payments are outsourced to insurers. No such control exists on voluntary transfers
2. No management information; ask large occupational pension schemes (like those mentioned above) who has transferred out and they’ll be hard pushed to give you decent management information. Third party administrators are not geared up to provide the kind of reports trustees need to understand the impact of these individual transfers.
3. No future skin in the game; trustees choose who provides members with their future pensions. They can conduct due diligence on the insurer’s covenant. They have no such choice on where member money goes on transfers and no control of how this money is paid to members (as members have total pension freedom).

Nobody wants to talk about voluntary transfers because (from a trustee standpoint) they are totally out of control.

We can also point to the Regulators (FCA and tPR), who have also lost control of what is going on. They are consulting on a joint strategy , but recent announcements fight shy of tackling voluntary transfers. This is amazing as….

1. The FCA tell us they are unhappy with 53% of the CETV decisions they sampled last year.
2. The Work and Pension Select Committee rightly concluded that the FCA had totally lost control at Port Talbot. Judging by the statistics above, there are many Port Talbots, many of which have yet to come to light.
3. The destination of the transferred monies suggests anything but an ordered market. The chaotic “voluntary”  withdrawal of advisers from the market is leaving many pension scheme members unable to complete transfers (to general frustration).

Nobody wants to talk about this because it points to there being a train crash. This train crash is not on some branch line, it is on the main line.

Employers happy , trustees concerned , regulators terrified

That would be my current answer to the question posed in this blog. The Regulators who are responsible for protecting consumers (but also wider public policy) are terrified that when the outcomes of this £34.2bn voluntary transfer become evident, the fans in Whitehall and Canary Wharf will be distributing manure on an industrial basis.

Trustees are concerned but not overly so, their funding levels will improve as risks disappear. They don’t know what kinds of risks they are losing – they don’t know whether they are losing unhealthy members looking to spend before they die or the clever sods who will DIY their investments and live for ever. So the level of concern among trustees is not as high as it might be expected.

Meantime, employers are looking forward to the publication of their FRS102 numbers which should show (in many cases) a sharp drop in pension scheme liabilities on the balance sheet. It was not for nothing that Barclays chose to include the £4.2bn CETV number in its accounts – this is material to the shareholders – and materially positive.

So what does the Pension Plowman think?

I think that the awful truth is being supressed and that that is not good. It is better for the Regulators, Trustees and Employers to be clear about what is going on. The White Paper published last week on DB pensions, despite having a whole chapter (4) devoted to BSPS, hardly considers the impact of CETVs on DB schemes. LCP and Hymans’ surveys suggest that de-risking is an orderly market controlled by Trustees (and their advisers).

Meanwhile, the employers who have been used to paying handsomely to encourage Enhanced Transfer Values, now find that job is being done for them, on a huge scale, by advisers – and at no extra cost to them a above their best estimate funding levels.

If there has been a train crash, no one is telling the signalman, watch out for carnage down the line.

Full steam ahead