Over the bank holiday weekend, I’ve been blogging about the new orthodoxy, that buy-out of benefits is in the member’s best interests. Quietroom have published an article in Professional Pensions explaining how best to get this message across and there appears on my blog this morning , this response to my criticism of TPR’s lack of self-awareness in publishing some very flattering comment from stakeholders.
the lawyer gateway within TPR will not allow anything to be published that points to responsibility or culpability for the monumental loss of value wrought by the Sept/Oct22 LDI meltdown, or the terminal malaise that TPR funding policy has / is inflicting on our economic prospects. All self-interested bodies work against the greater good.
If/once you understand that TPR considers that the solution to its (myopic) remit is the Insurers (and indeed I’ve heard a number “professional” trustees (still) advocating recently that the buy-in is of course still the “gold-standard” for funding objectives), then you can appreciate why TPR is effectively seen as the trade-body for the Insurers. Think – who does it benefit?
Certainly, under its direction, one major growth area in pensions has been the Insurers and consolidators scrambling to take over Trustees’ assets on a very fully funded basis, while of course the provision of DB pensions (the actual gold standard for the working people) have declined, as has DB support for the wider economy.
Uncomfortable though it may be, time for the TPR to think about how to increase workers’ pensions and its role in the broader economy.
So why does TPR promote buy-out as it does? A cynical and over-simple answer is because it wants shot of DB as much as it thinks sponsoring employers.
But this is not proving as easy as might be thought. Firstly, many DB schemes are over reliant on valuations of illiquid assets , to court the attention of insurers.
Philosophically, LDI was precisely the right answer for TPR as it allowed itself to believe that borrowing bonds gave DB a chance to invest in growth assets , satisfying its role in the wider economy. But when LDI went wrong, the liquid growth assets were the first to be sold, leaving many DB schemes with a lot of gilts and illiquids.
Those illiquids are proving an impediment to buy-out and are either having to be sold at the insurer’s behest, or are keeping schemes from their “everlasting resting place” – with the insurer.
Secondly, the cost of buy-out is looking a price that is having to be paid by the tax-payer through higher borrowing costs for the Treasury. The FT reported last week
Economists at credit rating agency Fitch forecast that the combination of debt sales from the UK government and the BoE will be equivalent to 9 per cent of GDP this year. In the eurozone, the equivalent figure is just under 5 per cent.
Who is buying all these gilts?
“Undoubtedly, the surge in gilt supply along with quantitative tightening is weighing on prices,” said Matthew Amis, investment director at Abrdn. “It’s relentless and it will be for the next fiscal year.”
So the window for buy-out is being kept ajar by low liability valuations created by high bond yields. These high yields are because the price of the bonds are depressed meaning that the tax-payer is having to pay more to service Government debt. Behind all this is the latent demand for gilts, being hoovered up (thank you very much) by insurers and trustees readying themselves for bulk annuitisation.
While DB schemes sell off illiquids and gobble up gilts, DC schemes are being urged to do the exact opposite.
The destructive power of buy-out
Taking a step back, shouldn’t we be asking why, a few months after its disastrous advocacy of LDI ended in tears and wet pants, we should accept the Pension Regulator’s claim that “self-sufficiency and buy-out” are the new gold standard?
These strategies lock-out the possibility of investment in productive capital and condemn members to the meanest benefit formulation the insurers can get away with. Any free assets not needed to pay the insurance premium look destined for advisory fees. Members are being sold the “gold standard” line by communication agencies paid by employers, trustees and insurers.
The tax-payer is keeping the buy-out window open by sponsoring debt repayments twice the cost of our European neighbors and defined benefit pension schemes are offloading their long-term illiquid investments to meet the Pension Regulator’s requirements of them.
This doom loop is now to be supported by loading yet more of the risk of the pension system onto workplace pensions and its 30m savers.
Who does this promotion of insurance over investment benefit?
Sadly, the answer is that it benefits no-one. We are selling our “great economic miracle” – our system of funded DB pension schemes , to insurers on the cheap and the discount is being picked up by the tax-payer in short-term borrowing costs.
When the liabilities have moved to insurers, so have the assets backing them, or at least what’s left of them after LDI and any further sales to meet insurer’s requirements.
We have become inured to the possibility that an insurer can fail, but as Paul Brine of Dalriada has shown there are risks even under insurance solvency regulations.
We are told that it is too late to stop the destruction of funded pension schemes. But I don’t believe this is the case. There are senior executives such as William McGrath arguing that a DB investment fund, maintained by an employer to pay pensions could be aligned to corporate goals on sustainability and social responsibility. There are unions whose responsibility is to negotiate the best deal for union members and there are pension scheme members who can and should have a voice in what is happening.
Finally, there are the members of DC pension schemes, who have been treated as second class by almost all stakeholders so far. They too should be asking questions as to why they should be required to take on all the extra risk of an illiquid driven investment strategy. They shouldn’t and while I support DC schemes investing for growth in private markets, I do not support this as a political necessity.
On a transactional basis, one could argue and live with the approach that its about the price to secure the pensions. But should the dogma be driving that at any price. C-Suite reminded us recently with the Aviva self-buy-in that the insurer’s profit is circa 17%, and more like 20% for external buy-in pricing. So, for a £5bn scheme, say, is it really in the member’s (or the sponsor’s) best interest to transfer over £1bn profit to the insurers.
And those are the doubts even if only looking at this from a transactional basis.
A primary responsibility under IFoA’s Royal Charter is a duty to put the public interest first ie to consider the broader good.
Aside from the questionable regressive distribution of members’ assets (ie the surplus) to Insurers, has the profession considered the risk and harm to the public good from the concentration risk inherent (but overlooked) from the current funding orthodoxy? The absence of debate from the IfoA on this critical issue for our nation is staggering.
And by that I mean the economic harm from a handful of (like minded) new owners holding the bulk of the nation’s DB wealth, their disinclination to use it for meaningful ‘investment’, and the over-reliance on a single issuer of gilts (UK Gov) to pay the pensions. And that is before we even start to assess the improbability of UK Exchequer ever being able to repay those gilts.