The scope of this, and the creep, will be crucial. One insurance exec told me any move that “blew up” the buyout market would put at risk previous pledges from insurers to invest £100bn in infrastructure and other long-term assets.

— Ian Smith (@iankmsmith) November 16, 2023

There are many adjectives that can describe the UK insurance industry right now but “fragile” is not one of them.

Insurers have the pensions industry by the scruff of the neck, their pooled funds sit on insured platforms that dominat esmall scheme DB and DC investment strategies, they own many of the workplace pensions that deliver our money to their platforms and their funds and they have a monopoly on the annuity business that increasingly pays our DB pension promises , as well as about 10% of the money being spent by those with DC pots.

In short, the insurers have funded pensions their own way and seem resentful of anything that is not theirs.They have baked into their financial plans for the nest ten years the annuitisation of what is left of “Britain’s Great Economic Miracle”- our funded corporate DB sector and they object to anything that interferes with the implementation of that plan.

Scope creep?

Whatever “lunch” , the ABI think the PPF will be eating is one that would give insurance companies indigestion. The long tail of DB schemes in the UK runs to some 5,000. The vast majority of value for insurance companies lies in a few huge schemes that they are already talking to and cherry picking to maximise their shareholder returns. The small schemes that are left for the PPF and commercial superfunds to “digest” may occasionally get a look in with Just or Canada Life- two insurers who feed off the scraps at the large insurer’s table.

However, most of these small schemes have assets of less than £50m and a very large number of them are insufficiently funded to have a realistic chance of ever making it to the levels of solvency needed to make them insurable.

The PPF has a track record of success and has 1000 examples of transferring such schemes onto its balance sheet. It has done so, not by selling itself, but by being there, a welcome lifeboat in a turbulent sea,

The Government now seem persuaded that the PPF may want to and be able to compete against the insurers to provide a service that pays pension “in full” to members of schemes that choose the PPF as their consolidator.

I say “choose” because other options exist. Option one is available to any scheme that wants to rely on the covenant of its sponsor to run off over time. Many schemes have strong sponsors who are prepared to do this and there are means to organise these schemes using capital backing from the market and operational support from external administrators to ease the funding burden.

In addition, there is interim legislation in place to allow “superfunds” to operate, not just as a “bridge to buy-out” but to run-off liabilities.

I do not hear any of these organisations whingeing to the Government that the PPF might eat their lunch, though they have been living on thin gruel for some time.

The market reality is that the ABI and its members are growing fat on the rich pickings they enjoy today and are reluctant to see any competition emerge, other than the disastrous option of a scheme falling into PPF assessment as it contributes to the demise of its sponsor.

If there is one body that is guilty of scope creep, it is the ABI, that has supressed the development of superfunds, encouraged a regulatory culture that refers to insured solutions as “gold-plated” and has ruthlessly supressed attempts by any organisation to encourage run on of occupational pensions.

Productive finance?

The insurance companies would like us to think of themselves as a source of productive finance for the UK. It is true that some insurers commit parts of their internal reserves to socially benevolent projects and I have recognised the deployment of capital by organisations such as L&G into social housing and Government led PFI projects.

That presentation has now been viewed on my social media over 50.000 times and I will not have the insurers say that I am not even handed.

But the money that the insurers recycle after buying out pension schemes is not invested in productive finance but is leant to corporate bodies as “bonds”, money that is not committed to the projects but to their financing.  Annuities are not backed by equities, either listed or private.

This is not productive finance as the Mansion House’s three golden rules would have it. Indeed it is replacing the financing of Government through gilts as insurers do not use gilts to back annuities. Annuities are painted as furthering the aim of the Mansion House Reforms but in fact they eat away at the capital base that could be deployed to productive finance. It is only pension  schemes that run-on that have the time horizon to invest productively.

Are the PPF best placed to consolidate?

I can see a Government’s sovereign wealth fund being used to consolidate pension funds but it doesn’t look anything like the PPF today. Re-purposing the PPF is going to take a lot more than flicking a few switches on the investment dashboard. It will mean recreating a culture that is currently geared towards risk reduction

The issues that present themselves are very pressing. Right now we have a large number of small schemes which are temporarily solvent – due to high interest rates. If those interest rates were to fall ,many small schemes will quickly move back into deficit, most particularly those who sold assets in the LDI crisis and lost their hedges. The estimated £600bn decrease in asset values reported by the ONS over 2022 have not been recovered in 2023, the asset coverage of liabilities (excluding discounting) is markedly lower than it has been.

If the PPF were to consolidate  small schemes , it were best this was done quickly.

But the report featured in the tweet above (from the FT) suggests that the Autumn Statement is likely to lead to a consultation following which we will need to have the usual parliamentary process to get the legislation on the books. In line with most things Governmental, I fear that there is insufficient time for the process to be properly conducted.

It would be better, for the Finance Act to lay a path to legislation in the next Government that would convert interim law on superfunds into full legislation, clarify the Government’s intention to allow DB schemes to run on – either under their own steam or with additional covenant support and to make all trustees and employers aware that selling your scheme and its surplus to an insurer, may not be value for the beneficiaries’ money.

One size does not fit all , insurance companies need to learn to play nicely