Yesterday I wrote about my fears that in the rush to pay for an insurer to buy-out their pension scheme, employers and trustees may be ignoring the interests and interest of members. The “interests” of members may be better served by transferring to a super trust with the promise of a profit share, or by staying in the existing scheme. The interest from members, whether waiting to pick up the pension, or in retirement , struggles to find a voice.
There exists within most occupational pension schemes a margin of funding that is there for “prudence”. Prudence has become more than a concept, it is an amount of money that can be realised by trustees to meet the worst case scenario, the possibility of a cash-call to pay pensions – which cannot be met by the existing assets of the scheme.
The amount of prudence within a pension scheme depends not just on the level of caution of the trustees but on the willingness of employers to fund it and the demands of the Pensions Regulator that it is there. This tri-partite of competing interests sees the trustees caught in the middle. Sartre described hell as three people in a room and that’s what funding negotiations feel like for many trustees.
But prudence is a very strong character and in the negotiations she has usually got her way. Many occupational schemes now find themselves not just properly funded, but super-funded and the question now is “who owns the prudence?”
Historically – prudence has been distributed to members through CETVs
At the height of QE with gilts yielding next to nothing and pension schemes investing ever greater amounts in “risk-free” assets, the discount rates used to calculate transfer value to member’s pension pots meant that members could receive more than 40 times their prospective pension as a cash sum. Within this huge amount was the prudence built into the scheme, which the member got a slice of – early.
But staying in the scheme, and seeing the scheme paying its prudence over to an insurer for little more than the bare minimum benefit is a bitter pill for members to swallow. They have chosen to stay in the scheme and that bet was made in the knowledge that if the employer failed, the scheme would go into the PPF. Are members being rewarded for their loyalty or are their interests being thought of at all?
Part of the trouble most members of occupational schemes have in this, is they are no longer part of the employer’s workforce, they are either retired or working for somebody else or “economically inactive ” – the polite way to describe people “out of work”.
Not only are these people not in the employer’s workforce, they are not represented by the employer’s union. The unions are yet to get to grips with a member’s right to his or her prudence. They appear to think that the battle for corporate pensions has been lost and that a “buy-out” is as much as most private sector DB members can expect.
The distribution of the surplus assets – the prudence – should be a a matter of great interest to members of private sector DB pensions, as should be their investment.
The temptation for trustees who find themselves in the luxurious position of choosing whether to buy out or defer buying-out is that they park the scheme in an investment lay-by where the scheme is fully locked down in non-productive assets with the engine on idle.
This is a good way of burning off a surplus but not a good way of looking after member’s interests. This is what is known as “reaching self-sufficiency” and it really isn’t much better than buying out and not distributing the surplus.
My hope is that we can open this debate now – and that we can ask questions of the schemes we are in , about whether the buy-out or the lay-by of self sufficiency, really is the best policy. Our great pension schemes were designed to pay pensions, not line the pockets of insurer’s management and those of their shareholder’s.
Taken from the blog…..
“At the height of QE with gilts yielding next to nothing and pension schemes investing ever greater amounts in “risk-free” assets, the discount rates used to calculate transfer value to member’s pension pots meant that members could receive more than 40 times their prospective pension as a cash sum. Within this huge amount was the prudence built into the scheme, which the member got a slice of – early.”
“But staying in the scheme, and seeing the scheme paying its prudence over to an insurer for little more than the bare minimum benefit is a bitter pill for members to swallow. They have chosen to stay in the scheme and that bet was made in the knowledge that if the employer failed, the scheme would go into the PPF. Are members being rewarded for their loyalty or are their interests being thought of at all?”
“Part of the trouble most members of occupational schemes have in this, is they are no longer part of the employer’s workforce, they are either retired or working for somebody else or “economically inactive ” – the polite way to describe people “out of work”.
“Not only are these people not in the employer’s workforce, they are not represented by the employer’s union. The unions are yet to get to grips with a member’s right to his or her prudence. They appear to think that the battle for corporate pensions has been lost and that a “buy-out” is as much as most private sector DB members can expect.”
________________________________________
Deferred members of the British Steel Pension Scheme (non-pensioners up to their normal retirement age which is usually 65) still have the option to transfer out. Some of them (including myself) are still employed by TATA Steel UK and are represented by the Unions. As a buy-out of the Scheme is on the cards, are you saying that a transfer could now be a viable option for these members before it’s too late? If so, we’d be hard-pushed to find an IFA who would undertake this on our behalf, due to the BSPS transfer scandal over the past few years.
The BSPS2 News Brief (March 2022) included this message from the Trustee Chairman…..
“Another Trustee priority is to ensure that benefits are paid in full and on time, not just today but into the future. This means that the Trustee needs to manage the risks facing the Scheme and do whatever it can to protect members. With this in mind, at the end of 2021 the Trustee entered into a policy with Legal & General (known as a buy-in) under which around 5% of liabilities were insured. This does not affect the benefit entitlements or security of benefits of any member. The buy-in policy is held as a long-term investment. Entering into the buy-in policy means that Legal & General is now a data controller in relation to the Scheme”
Also, in July 2022, the BSPS Trustee and Legal & General Investment Management (LGIM) issued a joint statement which included…..
“The Trustee of the British Steel Pension Scheme (“BSPS”) and Legal and General Investment Management (“LGIM”) are pleased to announce an agreement in principle that LGIM is to be appointed to manage the combined assets of the BSPS Defined Benefit (DB) scheme. Under this agreement, and at the same time, a number of employees of the scheme’s in-house investment manager will be transferring to LGIM to support the transition, which is expected to commence in the final quarter of 2022.”
Stefan Zaitschenko (member of BSPS2) is the British Steel (BSPS2/old BSPS(PPF) Group expert on Facebook. He has previously said this on the subject, which I also agree with…..
“I still hold onto a hope that the Trustee/tPR/PPF would allow a strong low risk BSPS2 to continue without a sponsor as a Zombie scheme with a potential increase in benefits.” https://henrytapper.com/2022/03/29/why-pensions-need-a-shift-from-a-deficit-to-a-surplus-mindset/#comment-139527
However, this hope now appears to be diminished.
Robert, I am not suggesting that anyone forsakes the benefits from the BSPS scheme for a CETV. But I think that the current economic situation has created an opportunity for renegotiation of the price paid to buy-out the liabilities. Let’s hope that all parties put the member first and assure them the best terms available.
Thanks Henry.
With regards to the British Steel Pension Scheme (BSPS2), it seems that a buy-in is on the cards and not a buy-out (please correct me if I’m wrong)? I say this because the BSPS2 News Brief (March 2022) included the following message from the Trustee Chairman…..
“Another Trustee priority is to ensure that benefits are paid in full and on time, not just today but into the future. This means that the Trustee needs to manage the risks facing the Scheme and do whatever it can to protect members. With this in mind, at the end of 2021 the Trustee entered into a policy with Legal & General (known as a buy-in) under which around 5% of liabilities were insured. This does not affect the benefit entitlements or security of benefits of any member. The buy-in policy is held as a long-term investment. Entering into the buy-in policy means that Legal & General is now a data controller in relation to the Scheme.”
The Barnett-Waddingham Finance Directors’ Guide to Pensions – Buyouts and buy-ins says this…..
“With a buyout, the scheme’s liabilities are transferred to the insurer and the sponsor’s obligation to the members is extinguished. The terms of the insurance policy are required to precisely match the form of the members’ benefits under the scheme. Securing such a policy arrangement can be a long, protracted process. A buyout normally precedes a wind-up of a scheme and involves the entire scheme membership being covered by the policy. A buyout of only part of the membership is rare due to the fact that the scheme’s trustees could be seen to be favouring one group of members by providing them with increased security (i.e. those covered by the bulk annuity policy) over the remaining members.”
“Under a buy-in, the policy is held by the trustees and is effectively a scheme asset which pays the members’ benefits. In other words, the ultimate obligation to pay the members still remains with the scheme. A buy-in policy does not reduce the security of those members whose benefits are not insured by the policy, as income from the insurer can in theory be allocated across all the beneficiaries.”
https://www.barnett-waddingham.co.uk/finance-directors-guide/liability-management-risk-reduction/buy-outs-and-buy-ins/
Can I ask what your thoughts are on this please i.e. BSPS2 buy-in or buy-out?
The buy-in with L&G relates to only 5% of the liabilities. When the Scheme is “bought out” – expected to be by Pension Insurance Corporation, the rest of the liabilities will also become “insured” by annuities. I am not sure whether the L&G policy will remain in place or not , but what everyone needs to be clear about is that the best terms for members are secured – and that if there is a surplus of assets over liabilities in the Scheme, it is used for the benefit of members. This blog relates https://henrytapper.com/2022/04/26/who-owns-the-bristol-water-pension-surplus-steelworkers-take-note/
Thanks Henry.
Yes, I understand that the buy-in with L&G relates to only 5% of the liabilities.
In the BSPS2 Trustee Debrief – August 2022 https://www.bspspensions.com/library/11/meeting-debriefs/ it also says…..
“The Trustee had successfully transacted a second buy-in policy with L&G earlier in the year, bringing the total proportion of insured Scheme liabilities to just under 30%.” https://www.bspspensions.com/library/11/meeting-debriefs/
I assumed that L&G were a favourite for the BSPS2 buy-out and I’m a little disappointed that they’re not as L&G seem to be one of the best Pension providers?
I understand that Pension Insurance Corporation plc (PIC) are in the process of buying-out the Old British Steel Pension Scheme but there has been a delay due to a certain legal ruling (would this be GMP Equalisation?). However, they expect to complete the buy-out by April 2023. I noticed that the Old BSPS have informed their members that the delay in completing the buy-out will not impact the way in which increases to their benefits are determined and any increases will be backdated, which is good news.
I’ve heard some mixed reviews on PIC?…..Can I ask how you rate them for a potential BSPS2 buy-out?