The headlines and trustee statements talking about selling the liabilities, in practice, BP will be selling the assets to pay for an insurance policy. This blog argues that selling the liabilities means selling the assets. The fund may in future consist of insurance policies paying pensions but to all intents , the trustees will have handed over the keys.
This is the Trustee statement , presumably sent to the FT and the Times who also report on it as a “shift in liabilities”. I find it opaque and misleading , buying insurance policies means liquidating assets and exchanging them for an illiquid buy-in policy in an irrevocable deal. The Trustees are using semantics to hide the truth- they are considering selling out.
“As trustees, we have a duty to continually review and assess all investment options to manage the security of the fund and members’ benefits. Such options include long-term insurance policies,” the BP pension fund trustee said in a statement. “Investing in such a policy would not amount to selling the fund, which would continue to operate as normal under the oversight of its independent trustee board.”
An unwelcome U-turn made by the Trustee.
This is as unexpected as it is unwelcome.
In May, BP rebuffed an appeal from its pension trustees to increase payouts to help thousands of retired staff to manage the “challenging set of circumstances” raised by the energy crisis from which it has generated record profits.
BP made record profits of $28 billion last year. The pay of Bernard Looney, 52, its chief executive, more than doubled to £10 million, with a £1.4 million salary, a £2.4 million annual bonus and a long-term share bonus of £6 million.
BP’s Pension Fund Accounts to the end of 2022 will be published by the end of September. If in line with its peers, these accounts will show a healthy surplus as liabilities will be valued much lower due to a higher discount rate. This is presumably why BP feels it is time to explore handing over responsibility for paying nearly 70,000 pensions to current and former staff to an insurance company.
In so doing it would extinguish opportunities to manage the assets that back up the pensions and miss an opportunity to right some wrongs done by the company to the planet.
It may also throw away the opportunity to use the pension scheme to improve the retirements for current and future pensioners as reported in the Times on May 15th.
The oil and gas group’s pension trustees have written to 69,000 members of its defined-benefit scheme to tell them BP had made the “disappointing” decision to decline a discretionary increase above the scheme’s cap of 5 per cent. The trustees had told retirees in November that they were approaching the company because of “the impact of the conflict in Ukraine” and the “difficulties caused for many of you by these latest developments”.
Brendan Nelson, chairman of BP Pension Trustees Limited, told its members that it would “continue to keep this matter under review” and that later this year it would “carefully consider” the pension increase that becomes effective from May 1, 2024.
Is this a good deal?
This story, broken by the FT would be a game changer for the insurance industry. The current record risk transfer stands at £6.5bn – the sum taken on by insurer PIC from insurer RSA’s pension scheme. This would be four and a half times bigger and would represent two thirds of the £45bn market capacity estimated by LCP. Even if that capacity were to increase to £60bn in 2023 (as LCP predict) , this deal would take half the market.
Is this a good deal for the market? If you believe LCP’s capacity predictions, it effectively destroys immediate capacity – it creates potential concentration risk around the lead insurer and asks questions of the capacity of the reinsurance market to take on what the lead insurer can’t. It will distort the market and I doubt it will be welcomed by other trustees and advisers lining up for buy-out.
Is this a good deal for the country? On Monday, Jeremy Hunt is due to use his Mansion House Speech to explain why pension schemes should invest in productive capital. Investing in an insurance policy that guarantees pensions is not the best way to invest in productive capital, it effectively dooms the majority of the asset transfer to further purchase of Government and corporate debt. Hunt seems to have accepted that the best he can expect from corporate DB schemes is that they support “a strong and diversified gilt market”. Even so, losing up to £30bn from potential growth investments doesn’t encourage the market. Current solvency rules mean that this transfer will be in defiance not compliance with Government intentions.
We might well wonder just why Superfunds are not competing for all of some of BP’s money.
Is this a good deal for the insurer(s) Assuming they can maintain most of their reported 20% margin on bulk annuity business, this looks like a golden goose for those insurers involved. It may help those not involved to take on more business at better margins, since the capacity squeeze would be even greater. It should be a great deal for insurers
Is this a good deal for the planet? BP had an opportunity , through its pension scheme of giving something back to the planet , for the damage it has done over the years. Handing over the assets of the pension scheme to an insurer, forfeits that opportunity. This would be an ESG cop-out on a massive scale.
What’s in it for the members? There will be some sweeteners, members would no longer need to fear a haircut from the PPF if BP went bust, and would probably consider the insurance covenant preferable. But as previously stated, BP’s covenant is strong, it may be a “sin stock” but it is showing no sign of going out of business. So members will lose the opportunity of future discretionary increases for a marginal increase in security.
Would this be a good deal for BP? Locking in to current gilt yields is a great deal for the shareholders and for the senior management of the scheme. This would be a boardroom bonanza as an accounting windfall for BP share and bondholders helps senior managers bust through their KPIs.
BP in talks over insurance deal for £30bn pension scheme https://t.co/qjKV1PQsaJ ” analysts suggested the move could help improve BP’s credit rating, because rating agencies assess pensions as liabilities.” Spot-on…
— John Ralfe (@JohnRalfe1) July 8, 2023
BP members should protest
If I was a BP member, I’d ask my Trustees to cease negotiations with insurers and focus on their plan to manage the assets with regard to the planet’s, the country’s and my future.
May I extend the debate by asking –
What does the trustees’ independent employer covenant assessment say?
Would insurance just involve an in specie transfer of the existing BP gilt and bond portfolio with a longevity protection being added?
Was the PRA supervisory framework considered vastly superior to TPR?
What advice was provided on the employer and trustee legal discharge of buy-in/out?
Did considerations include Superfunds? (What a potential super start for one.)
Was H M Treasury. BoE, TPR or the Chancellor sounded out?
superfunds do not offer one hundred per cent protection of pensions in the way that insurance polices do, so why would BP pension trustees consider a superfund? That would be an even greater dereliction of duty.
I believe the likely reason for the refusal of the BP Board to support maintaining the purchasing power of the pensions by way of a discretionary increase is that under the accounting standards (IAS19) the cost of that increase is reported as a past service cost and hits the Company’s current year’s Profit and Loss Account as an administration cost. Any (offsetting) gains in the pension scheme arising from an increased assumption about future investment income (a rise in Gilt yields for example) is regarded as a re-measurement of liabilities and is taken below the line to the Statement of Other Comprehensive Income.
If however the company had chosen to set their assumptions that future pension increases would fully align with their reported inflation assumption, the cost of those increases would be reflected in the current service cost of current active members only (calculated using the start of year discount rate) and the cost of actual increases discretionary to the Scheme above the assumed rate is reported as an experience loss on liabilities taken below the line and wouldn’t hit the P&L A/c.
The assumptions used for the Company’s Accounts are (as noted on page 300 of BP’s Annual Report) are set by management after the year-end, and I understand do not need to follow the assumptions used for pension scheme valuations.
I would also draw attention to your 8th March 2023 blog – DB Pensions and their Wasteful Risk Transfers https://henrytapper.com/2023/03/08/db-pensions-and-their-wasteful-risk-transfers/ reporting on William McGrath’s of C-Suite’s Pensions Playpen Coffee Morning.
I’m glad I’m not alone in calling for this proposed buy-out to get some attention
If this goes ahead, the insurers margin will be c20%. It is an undeniable fact that the Trustees will be handing over c£6bn (of members’ assets) that can NEVER go to members or the sponsors, and all because, in the UK, TPR (aided by the secondees from the ‘industry’) has deliberately designed a regime imposing maximum personal jeopardy on Trustees from continuing with any level of investment risk. And at a macroeconomic level it’s just stupid for UK. Another own goal from TPR.
The key comment in BP’s Annual Report and Accounts when reporting a $7,588M pension plan surplus at the 31st December 2022 was:
“The surplus on the primary UK pension plan is recognized on the basis the company is entitled to a refund of any assets once all members have left the plan”
Even though those assets were partly purchased using Members’ contributions. Including those made under a salary sacrifice arrangement!
Peter, the assets were also purchased with tax-advantaged employer and member money, Much of the money in the fund is “tax foregone”.
Agreed – but BP will suffer a 35% tax charge on the amount refunded.
This is recorded as a deferred tax provision of $2,692M in the Accounts.
Although this may well be less than the tax relief on the original contributions, it would still be a useful windfall to the Treasury.
For a number of years at least the BP Pension scheme has been hedging the buy out cost with LDI, The total value of the Scheme assets at 31st December 2022 shows
£9.5BN of index linked gilts and £3.1BN of fixed interest gilts reduced by £4.2BN “debt repurchase agreements used to fund liability driven investments”. It therefore appears that the Trustees have planned to buy-out for some time. However if they had not used LDI and left a larger proportion of the scheme assets in equities (target 10%) they would have had a larger surplus to not only fund the buy-out but also a discretionary increase to pension benefits.
You are however correct to point out the systemic risks created by the transfer of the such a large value of pension liabilities to the insurance sector including the effect of the subsequent release of the Gilt holdings onto the open market and the likely consequential effect on future Gilt yields and the inflation assumptions used by other pension schemes.
Incidentally in their Accounts, BP does make clear that using LDI they are borrowing on a short term basis against the long term income flows of the Gilts (particularly index linked Gilts) which is the basis on which Prof. Bennett argued that LDI is ultra vires speculation (your blog of the 7th July).
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