The Pension Regulator has written a third blog in a month which moves forward the Mansion House reforms in a positive way
The third blog by Mike Birch , is extremely well written and clear in its intent. It is also very pragmatic. It deals with the most technical of TPR’s tasks, how to keep DB schemes properly funded (without compromising member interests).
TPR have a number of tools at their disposal , to protect sponsors becoming insolvent and schemes falling into the PPF. To date it has relied on the “stick and stick” approach of a DB funding code that has been criticised for requiring schemes to be overly prudent, rely on the sponsor and so disable the sponsor from making widgets.
It is probably too much to expect the underlying principles of the Code to be changed (or scrapped). But it is possible for the Pension Regulator to promote alternatives to the prescriptive and expensive ~”fast track” approach, allowing many schemes with weak covenants to run-on.
Fast Track should not be prescribed to schemes with strong sponsor covenants (though any scheme may aspire to buy-out). Many schemes are not ready or right for buy-out, sadly – without help – they are ready and right for the PPF.
Neither the PPF or buy-out need be the end-game, the prospect of schemes paying their own pensions has become desirable to a regulator charged with returning the £1.5 trillion, trapped in DB schemes – to productive use.
The Pension Regulator should be assisted to this end by pension superfunds. However, to date it has had an uneasy relationship with superfunds. It has approved only one, and that is offering no more than a “bridge to buy-out”. As a means to “running on” no superfund is available.
While this state of affairs is being sorted out, TPR is looking at “alternatives” and has alighted on what is called the Capital Backed Journey Plan (CBJP). Here the idea is that capital – by way of a contingent asset of “buffer” is lodged with an alternative sponsor to the historic employer.
Think of a steam locomotive charged with hauling 12 carriages up a steep gradient. It is possible to attach a second engine – with considerable power- to assist it to the top.
So in pension finance, the secondary engine being a capital backed secondary sponsor able to get the pension scheme to a position where is can take choices – including run on- because it is either sufficient in itself or happy to run on in a consolidator.
Pragmatic
I’ve said many times that we need to see a new mindset from the Pension Regulator and here is an example
We have set out in our DB superfund guidance that where CBJPs are considered in these types of circumstances, elements of our superfund guidance would be applicable. We expect to assess CBJP proposals against the guidance. We have retained flexibility to enable us to ‘turn on or off’ various aspects of our guidance and expectations to suit the circumstances of each CBJP.
This is an extremely helpful statement, I cannot but think it will encourage the organisations lining up capital to back pension schemes to do so with more confidence.
TPR’s approach gives employers with no “prospect of” or “intention to” buy-out – encouragement. And encourages trustees, wanting every pound in the fund to be spent on the member, with hope.
I’m afraid I don’t see much of a “new mindset” from TPR here, Henry.
To quote from one of the consultants’ briefings on CBJPs:
“There are many reasons why CBJPs are seen as an attractive opportunity by a range of investors as, unlike the insurance market, they are not regulated by the PRA. This means the market has a much lower barrier to entry, compared to establishing a regulated UK insurer.
“The 5-10 year investment timescales, along with a clear exit strategy will also be attractive for venture capital and other investors acting as capital providers.”
And if I go back to the trade press when the first CBJP was announced in April 2020, I read this:
“The structure of the ‘capital-backed journey plan’ saw capital ‘locked in’ alongside scheme assets from the outset, allowing scheme members to benefit from an additional layer of security in addition to the existing sponsor covenant.
“A future date for the buyout of benefits was also agreed at the outset, with the assets then invested to target the cost of buyout at the agreed date and provide a suitable return on capital.
“This allows the unnamed scheme to draw down cash as needed to pay benefits until the buyout is achieved, with interest rate and inflation related risks hedged out in full during the period.”
This very much sounds to me like the old TPR mindset of de-risking and targeting gilts-relative buyout with full hedging, rather than more productive investment in other assets. And TPR appear to be suggesting an unregulated structure, rather than regulated investment. No doubt TPR sees a role for itself in regulating the unregulated.
The consultants meanwhile observe that “due diligence is likely to require actuarial, legal and potentially covenant advice.”
In fact, if it’s really all about strengthening the sponsorship, I would have thought covenant advice was essential rather than potential.
Nice work if they can get it.
I’ll be delighted to be proved wrong about this.
TPR will no doubt seek to stick its nose in, wanting still to anchor everything on buy-out flightpaths and the de-risking mantra (which it will continue to so do UNTIL gov’t grasp the nettle and and changes its remit, and so freeing the economy from this 20-year in the making stranglehold of de-risking / dis-investment).
But, CBJP is some new thinking and at least this might provide some prospects for schemes to run on for members – there is not reason why a CBJP can’t be deployed to support a run-on including the generation of value to augment benefits and/or return excess to sponsors so feeding back into the real economy.