Within three weeks from taking power , the new Government has
- Announced a Pension Schemes Bill
- Created a review of workplace pensions
- Re-written the rules for capital backed pensions.
The consistent theme throughout is “capital”. Pensions are considered a store of unlocked capital that can be unlocked by priming schemes to run on, release surplus and invest productively. The Pension Schemes Bill will enable this to happen by (at last) setting in place lasting rather than interim legislation.
But the thought of over 5,000 occupational schemes running on, all with the full cost base of their own administrative, investment and advisory infrastructure is unappealing. The capital that is needed to release capital, is also needed to consolidate DB schemes by creating superfunds.
£600bn was sucked from private sector DB pensions in 2022. £166bn of it lose in collateral payments to maintain LDI in that October. Although notionally better funded , DB pensions are materially weaker in terms of payment coverage. Many smaller schemes are now unhedged, for many deficit contributions continue to trouble sponsors, scheme liabilities remain on the balanced sheet, restricting corporate strategies – especially growth strategies. There is insufficient capital to release sponsors from its obligations to schemes typically close to future accrual.
Last (but not least) , the Government envisages a new kind or pension which converts DB pots into DB pensions using the same sources of capital. This looks the most exciting opportunity for innovation of the lot. 80% of savers surveyed recently by Scottish Widows told the master trust provider they would prefer a lifetime income to a pot. If capital backing can turn pots to pensions (as the Government considers they can) then a resolution to the challenge of the pension freedoms may be at hand.
We may wonder that a Left-leaning Government should be putting capital at the hear of its pension strategy, even more that pensions are at the heart of its economic strategy. But it is so. The speed at which they have brought the Bill, the Review and now Guidance for Pension Superfunds makes clear that they intend to get all this done.
In backing superfunds and more general capital backing, the Government is moving towards pension solutions and diversifying away from reliance on insured consolidation through bulk annuities. Clearly the annuity market is finite because it is capital intensive and because bulk annuities only meet a part of the problem. As is increasingly becoming clear, the revised version of TAS 300 is requiring funding advisers to consider alternatives to annuities. Finally, there is capital lining itself up to back occupational schemes to run on , on terms that make sense to sponsors and trustees.
The Government has also recognised that capital can as easily back a DC as a DB pension promise. DC pots can become defined benefit pensions through the conversion of a pot to a guaranteed income stream. This need not exclude insurance. Just as Clara provides a bridge to buy-out , so a scheme pension can bridge to buying in an annuity or lay off unwanted longevity risk using the reinsurance market.
Capital is lined up to back both DB and DC pensions and it is now the job of Government , through its Pensions Regulator, to make this happen. There is no obligation on the private sector to participate, there needs to be a compelling business case for it to do so and the production of DB superfunds guidance suggests a willingness to work with capital providers that has hereto now been lacking.
The challenge to the Pensions Industry
After 40 years working in pensions, I know that vested interests are strong and resistant to change.
I spent the first 20 years working in an environment where it was assumed that employers would provide staff with pensions through occupational pension trusts. The second half of my career has seen the obligation to provide pensions pass from these trusts to pension savers. This hasn’t worked, the Government recognises this. While it is showing no inclination to return to an annuity culture where savings are insured by default, they have made it clear that it expects trustees to pay pension from pots.
We are now on a brink of a new era where DB and DC pensions are paid with the backing of private capital. This is not yet properly understood and there is a job of work, not least by people like me, to help people feel comfortable that change – challenging as it is – is for the good.
Thanks for making this clear.
Two points, however, on the new rules for capital backed pensions.
First, while tPR mentions protection for scheme members there’s nothing the guidance about how this has to be achieved. The Regulator’s lack of experience and knowledge in this area does not give me confidence.
Second, a question. What are the implications for the PPF of the proposal for Superfunds or CBAs on reduced capital adequacy? Is there now a choice of resolution and what does it mean for members?
Two thoughts:
Who are likely to be the capital providers? Could it be that pension schemes be a source of capital? Obviously not for their own schemes – we would need the equivalent of employer related investment rules, but why should they not be able to gain from the potential return available to the capital provider.
Does this create any new systemic risks?
The Court of Appeal judgement in the Virgin Media case was handed down this week. While the industry appears to be viewing this as a purely technical matter in respect of s37 of the Pensions Scheme Act 1993 in relation to contracted out benefits. As I read it the judgement confirms that the actuarial certificate is required every time changes are introduced to the Deed. A failure to record confirmation that the pension promises reflected in the Deed during the service period have not been affected will render any amending Deed void.
This will surely match to any transfer of liabilities to a new pension provider, including rights to discretionary benefits. Even where a benefit is granted at the employer’s sole discretion, the employer cannot remove the right to the discretionary benefit (Imperial Group Pension Trust v Imperial Tobacco Ltd 1990).
This absolute right to receive all the benefits provided in the Deed during the service period gives great difficulty with any form of transfer out of the ceding scheme which does not precisely match the Rules of that Scheme. Hence discretionary increases to pension rights have to be be provided before buy-out (and in buy-out terms?) before any surplus can be refunded to the employer. I believe therefore that the most likely form of capital backed journal plan will therefore be on a single scheme basis. The benefits of consolidation will therefore be somewhat limited – mainly effectively the capacity to invest in pooled funds with other schemes with the same capital provider. That is of course unless the benefits of the receiving pension scheme are such that the actuary can provide a certificate that no Member will be disadvantaged by the transfer.
With regard to Bryn’s point about the PPF, surely this is a situation where bringing PPF benefit levels into line with 100% of scheme benefits is appropriate, whether by payment of a super levy or not. The 105% of s179 valuation wind-up trigger and other capital adequacy measure would then provide enhanced protection for the Members. Yes, there should be a choice of resolution for Members.
The comments need a better authority than me – I’m reaching out to colleagues and readers. Many schemes don’t have discretionary powers over surpluses , those that do need to mind the Virgin Media case (with failed appeal) but there are some big wins for members not having the costs of a scheme impairing scheme solvency.
There are some really thorny issues here and for now the sole employer CBJP is the interim solution till we work these questions through.
I don’t see the PPF as a natural competitor to superfunds, though they may feel that Nest is a precedent.