Run on or buy-out – Hymans think outside the box

One of the wonders of the post Covid world has been the rise of the webinar and the sharing of IP by the pension fraternity. No consultant has done more in this space than Hymans Robinson and it is greatly to their credit that not only are they thinking beyond buy-out but they are sharing their thinking, not just with their clients, but the general public.

Here is there latest thinking on how insurance and run off strategies can be considered against each other. Press this link

The webinar is , in one sense, an advert for M&G and the use of a holding in its with-profits fund as a contingent asset or in conjunction with a captive insurer.The point’s that this allows sponsors to pre-fund future risk using the Prudential’s with-profits fund and the structure allows surplus to be extracted by the sponsor with minimal hassle

I am of course contracting the complexity and probably missing the subtlety of the argument. The important thing is that solutions are starting to be discussed that allow pension schemes to remain open and run-off over time. This offers schemes an alternative to buy-out. LCP have put forward a solution that effectively puts the PPF as the insurance for members that should the sponsor covenant fail, there are assets in place to meet the member’s pensions.

If you are interested in this area of finance, or are interested in what pension schemes can do – if they are given a chance, you should tune into Edi Truell and Luke Webster talking about these things at Pension PlayPen’s coffee morning on Tuesday at 10am.

You can register for the Truell/Pension PlayPen event here

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Run on or buy-out – Hymans think outside the box

  1. Peter CB says:

    I agree Henry I think we might be seeing a fundamental change in attitude towards buy-outs of DB pension schemes. Are we seeing a return to the 1970’s and 1980’s where buy-outs were often seen at the destination of last resort?

    My initial thoughts on looking at the proposal developed by Hymans and M&G is “Why?”
    It appears a very complicated and costly solution to achieve a very simple objective – that the Members receive their pension benefits as they fall due.

    The lowest cost way of providing pension benefits as they fall due is by running on/running out the scheme with an investment policy that seeks to match cash outflows with cash inflows from interest and dividends and when necessary the proceeds from the realisation of the scheme’s capital assets, but only to the extent such proceeds are required. In a closed scheme, scheme experience will always trump longevity risk.
    If it appears these investment objectives could be more efficiently met in a larger scheme then consolidate.
    If a buy-in is being considered as an appropriate way of securing future cash inflows, the additional cost should be weighed against the risk of the alternative investment strategy and consider the loss of future scheme experience gains.
    The Members’ benefits retain the background assurance of the Scheme sponsor’s guarantee and in failing that of the PPF.
    If those guarantees are not likely to be sufficient would not increasing the security of 100% of scheme benefits through the PPF, either by a general increase in PPF protection levels or by the payment of a voluntary additional premium, not be the lowest cost solution?

    By following the lowest cost method of providing the defined benefits the funding requirement on the sponsor is reduced and the requirement for future additional contributions minimised. There is even the possibility that by avoiding a buy-out, the Trustee might be in a position to determine that a partial refund of Scheme surplus could be in the Members’ interests .


  2. byronmckeeby says:

    “In a closed scheme, scheme experience will always trump longevity risk.”

    If the scheme membership is big enough, probably.

    But there is “key man” (and it usually is a man or men) risk in small schemes which pool potentially long-living senior executives with average earners.

    I do agree with you, however, that this Hymans/Prudential/M&G proposal seems over engineered and complicated. Of course Prudential UK first acquired M&G and then in a turnabout de-merged in a way that seems to leave a re-listed M&G owning a de-listed Prudential?

    • Peter CB says:

      I first thought about the desirability of the cash flow management approach in a smallish scheme with a significant “key man” issue. Where within 3 years after buy-out (on a PPF+Little basis) I was aware of the death of a very small number of Members who had previously accounted for a significant proportion of the liabilities.

      In the cash flow forecast you will assume the key man pensions will be paid for the period being forecasted, but on the demise of the Member the forecast will be amended to substitute the dependant’s pension (if any). In this way the premature sale of income earning or growth capital assets is avoided.

      In some companies with historic closed DB pension schemes, I have suggested to the sponsor that in lieu of fixed annual deficit recovery contributions, they offer to pay (all or a proportion of) the pension payments out of the scheme during that year for the period covered by the Schedule of Contributions. This would be on the condition that that scheme reflected this in its investment strategy – i.e., reducing the need for matching assets . In the event these proposals were resisted by the Trustees/Scheme Actuaries mainly on the grounds that they were still required to provide the TPR with valuations with the post retirement liabilities valued on a bond basis and hence the valuation (but not the real) risks would be amplified.

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