British MPs will today hear evidence from pension industry executives on the £1.5trn defined benefit pension market.
Topics to be covered include funding levels and government efforts to redirect pension investment to help economic growth.https://t.co/lWCXsZIeQh
— Josephine Cumbo (@JosephineCumbo) September 6, 2023
The Work and Pensions Committee missed a trick when quizzing key actors on DB options.
This is the part of the pensions market where Government has little to lose and much to gain out of intervention and its key player is the PPF. While the DWP set the law and TPR the guidance that enables it, the PPF is the consolidator of last resort. As I have said several times recently, the PPF is an actor but it guarantees nothing. If the PPF fails, people get lower pensions, the taxpayer is not on the hook.
The DB end-game (King Lear Act V)
In the envisaged landscape (the Mansion House fantasy version), those schemes that are acceptable to insurers, buy-out. Or they “run off” – meeting the guidance of tPR’s DB funding code.
Schemes that don’t make the cut on funding , don’t get a shot at “buy-out” but can consolidate using a superfund. They can choose to run-off but are unlikely to get a bespoke funding path and will need to follow TPR’s “fast-track” (a route-march ).
Schemes that don’t make the cut on funding and struggle on “fast-track” head for PPF assessment and their sponsors to administration.
Consolidation is a win for the DWP and Government. Insurers do not embrace productive finance as the Government thinks of it. For the Mansion House reforms to happen , there need to be large consolidated schemes with the time, capital and expertise to manage these lucrative but difficult assets. Britain needs consolidation along with buy-out.
This is how it’s supposed to work but this is the “fantasy pensions” of the Mansion House vision.
What we saw on Wednesday was that the only actors with control are the insurance companies that “strut and fret their hour upon the stage”. In this case – the stage was a parliamentary committee room, the audience a group of MPs led by Chair Stephen Timms.
To say that insurers have a strong hand is to understate matters. In the second act of the drama, after the ABI and PIC had pushed off, Luke Webster, Adam Saron and Simon True turned up. It was like the final act of King Lear, the actors still live but they do so in a world seemingly devoid of hope. No business has been transacted by superfunds nor is likely to so long as the Pensions Regulator’s guidance offers no means for them to open their doors.
Simon True (CEO of Clara) told a particularly sorry tale. Thier 2002 pipeline, which they had hoped to conduct to the insurers over 5 to 10 years , announced they had been bought out rendering Clara redundant. What is the purpose of a superfund that is working for masters who eat your lunch?
Luke Webster of Pension Superfund may have surprised MPs by being even more direct. He told them that he and his organisation had no intention of re-applying to be a superfund until the rules of the game were made clear and the prospect of acceptance worth the application.
All that was left for MPs to hear, were the sad whimperings of a couple of asset managers , forlornly hoping that their master trusts might offer some short term relief to small DB schemes. Appearing alongside Tracy Blackwell and Yvonne Braun , they were extras to the main event.
Where was the PPF?
Life goes on after King Lear, but it is a life devoid of hope. So with the DB landscape, there is only hope of buy-out or the unimaginable terror of the “other”.
But of course this is fantasy pensions, pensions as played out by the insurers and their stage manager, the Pensions Regulator.
In the real world there is a Fortinbras come from Norway (the PPF) , or a Donald come from England (the PPF) to restore order.
The PPF want to become a consolidator and in a recent conversation with them , it became clear that they don’t just want to be the guys that drag dead bodies of the stage.
No rapture
N or do they see themselves as the “deus ex machina” envisaged by the Tony Blair Institute, stepping in with God-like authority to create a “rapture” for small schemes.
Instead, they see the options available to DB schemes much like the options open to employers when staging auto-enrolment.
Restoring order
It is clear to me and to many like me that there are precious few options open to DB schemes that do not start and end with insurance buy-out.
The consolidation market seems no closer to happening than in 2018 when the DWP announced it. The villain of the piece, the ABI and its membership, has been abetted by TPR who seem unable to countenance commercial consolidation, any more than they could see past Nest when the workplace pension market was forming.
But order did come to the workplace pension market. Government brought Nest to the table and table agreed how it would play with and against commercial workplace pension providers. The result is what we have today, a well-formed market.
For Nest – read the PPF.
It is now time for the PPF to get on the front foot in this debate as Nest did in 2010 and make it clear to the Pensions Regulator that it cannot consolidate alone but needs to work with commercial consolidators. It must also make it clear that the rules must make it possible for commercial consolidators to transact business.
Whether the PPF weren’t invited or didn’t want to appear, they were the actor missing from the 2 Act drama in parliament on Wednesday.
The PPF has produced a robust and readable submission to the DWP on the vision it has for DB options. I hope that it will get well read and that from it, we can have options for DB which best suit the needs of trustees, sponsors and most of all members.
Hope to a dying man
20 years ago the bulk annuity buy-out was the destination of last resort for a pension scheme, often buying out benefits well below the scheme defined benefit level.
The Pensions Act 2004 in establishing the PPF as an employer / pension scheme (not insurance provider) funded “lifeboat” appeared to envisage that if a pension scheme was assessed to have sufficient assets to pay more than PPF level benefits it would continue to run on as a closed scheme under the protection of the PPF. The decision as to whether to buy-out or not then remained with the Trustees to determine what was in the best interest of Members. There are examples of such schemes remaining “In assessment” under the PPF whose triggering event was 16 or 17 years ago.
What appears to have been forgotten by Trustees is to consider what is likely to give the best lifetime result for the Member. For Schemes in PPF assessment with surplus assets is it better to buy-out with an insurance company now on a PPF plus a little basis, or pay PPF level benefits for a period with a view to paying or buying-out higher benefits in the future as scheme experience permits? In the situation where interest rates are likely to fall the immediate buy-out at first sight appears to offer the better outcome but where interest rates are likely to rise run on would appear sensible. But then you do have to consider what would happen if your assumption was wrong – if you bought out before a rise in interest rates the members have lost out. But if your had run on and interest rates had fallen the Members are no worse off. The income to the scheme from its investments to pay the pensions has not fallen just because the market price of Gilts has gone up (the Scheme is unlikely to be buying new Gilts anyway).and they still have PPF protection.
Does the same not apply to the wider pension scheme population and should the insurance company buy-out not still be the destination of last resort? An alternative destination of scheme run is desperately required with consolidation available to those schemes where the ongoing administration costs influence a buy-out or not decision.
Yes, Peter, of course the insurer should only be the destination of last resort, not the default. The Govt look to the insurers to staff and draft the 2004/05 regulations for the PPF/TPR, and of course they gave us a system by insurers for insurers, where everything defaults to the insurers’ business model.
We need to consider two matters.
1 – can the industry have a clear understanding and acceptance that the TPR/PPF combo has failed under its primary precept?
– The PPF was to be a lifeboat of last resort “independent” from Govt funding for failed private schemes – funded in a way that reduced (or placed no) risk on the tax payer.
– But in fact DB schemes now hold over £1trn (ONS) of Gov gilts. So, via the channelling of cash from gilts the majority of private sector pensions WILL BE PAID BY THE TAXPAYER – that’s who pays gilts! TPR avoided “the risk” by making it a certainty that the tax payer is paying for private sector pensions. This is and will have catastrophic consequences for the economy (and those pensions so gilt funded).
2 –
Step 1 – Trustees should consider the probability (%age) that the scheme’s members’ pensions are fully paid on a buy-out.
Step 2- And then, considering Peter’s challenges on run-off, the Trustees should consider for a well funded scheme (with assets at least equal to the amounts that will be held by the Insurer) the probability (%age) that the scheme’s members’ pensions are fully paid on a run-on. Mindful that in a run-on the Trustee’s can still increase members’ pensions (ie for instance to reflect actual rather than capped inflation).
If the Trustees are satisfied Step 1 gives a better answer for members, then so be it. But be mindful that is different from considering what risks the Trustee has legally washed its hands off. Washing you hands of a risk, is not a job done, if you consider your obligation is to pay the pensions.