John Towner is an excellent advocate for the insurer’s belief that fellow businesses in the private sector have no business promising employees a wage for life, even for the years they have packed in their job.
In the article set out on Linked in and reset below, John sets out the assumption that employers want what is good for business today and that letting an insurer take away the promises made in the past decades is a means to satisfy guarantees to previous generations of workers.
There is nothing wrong in embracing this view of corporate obligations. A very large number of companies with defined benefit schemes want to sell on the promises in the hands of current and previous workers who entered into DB pension agreements. But there are large numbers of private companies where there is a wish to use the defined benefit scheme or maybe the defined contribution pension scheme, to offer workers either ongoing accession to securing more DB pension or the option of switching a pot of money into a pension for life. At the moment, insurers are the rulers of the switch as they own the annuity market. But an increasing number of organisations are questioning why a DC pot should be switched for an insurance policy that pays a set amount till the death of those insured.
Actually, some people are waking up to the current view of John Towner and his company that if you want a pension for life you’d better purchase it from Legal and General. There are others who compete for the insurance of an annuitized pension but there is virtually no competition from pension schemes who have accepted that they are out of the market, driven by insurers.
I would read the article below and ask yourself whether the insurance company is the only option going forward. I am writing this article from an NHS ward and have spoken to hundreds of staff who do not think of pensions as “insurance”. I am reading the works of academics who are getting their pensions from the USS, I converse with trade union officials who are enjoying open DB schemes or building their future pensions up,
I would argue the case against John Towner, none of these people are looking for the help of insurers and an increasing number of DB and DC schemes are considering whether they can use DB or CDC pension structures to ensure more ambitious pensions that can be achieved than by insuring with insurance pension systems.
They do not have the means to articulate their view point but they are increasingly vocative in exploring ways to offer people pensions rather than pension fund pots or insured annuities.
Thanks to John Towner, I can see that your argument will sit well with many business people but I ask you to look at the market as a whole. Local Government Pension Schemes do not agree, nor does the unfunded pension scheme sector. People who are in DC schemes or who have money purchase AVCs do not understand why they are restricted by insurance policies.
People in general think that the success of pension systems is something to share by more pension, This underground of thinking is set against the arguments below. Read what John has written and think if what he is saying what you think. It doesn’t meet my view of pensions but I believe many will side with John. Go on- give it a go!
Debating buyout vs. run-on: an insurer’s perspective
John Towner
Those who cannot remember the past are condemned to repeat it.
George Santayana
UK defined benefit (DB) pension schemes are in the healthiest, best funding position they have been for decades. This is a testament to and product of the careful planning and methodical work that trustees, companies and their advisors have put into their pension schemes over the past twenty years.
While it may be tempting to look at current surpluses and conjure up new approaches to running DB pension schemes, I believe an insurance buyout will remain the preferred option for the majority of trustees and companies to capture the improvement in their funding, bring their schemes across the finish line and well-and-truly secure their members’ pensions for the long-term.
As in any debate, context is important. Since the introduction of the Pensions Act in 2004, the past two decades have been challenging for DB pension schemes, to say the least. Most schemes are now closed not just to new entrants but to accrual. Some schemes – sometimes spectacularly – did not make it and entered the PPF at a cost to their members. Companies meanwhile poured hundreds of billions into their schemes to repair deficits – money which could have been invested back into their businesses.
It’s essential that we learn from the past, and the quote at the beginning of this article contains a level of wisdom that is relevant to this debate. The fundamental learning over the past twenty years is that companies far underestimated the complexity of honouring and delivering a defined benefit pension.
I should know. Pensions are the business of an insurance company. Endgame or run-on is what we do. We pay pensions in full on time, every time, in a safe and secure way, and the activity underpinning it is fundamentally different to the way that pension schemes are set up and have historically run themselves.
Endgame is not a quarterly meeting, an asset allocation decision and a manager selection process. It’s about sourcing investments to match assets to liabilities down to the cash flows; it’s about running tight hedging programmes with full collateral adequacy; it’s about managing longevity risk, and it’s about having a specific pot of capital available as a buffer – a covenant that is funded, so to speak – and not calling on a sponsor often at exactly the wrong time. Finally, it’s about delivering administration and customer care cost effectively and at scale well into the future.
I believe that as trustees and companies work through what it would involve for them to do this themselves, the vast majority are finding that it is not core to the company’s business and that insurance is the right choice.
In the current discourse about run-on, particularly in some recent press articles, there seems to be an unbalanced, ‘us-vs-them’ narrative which seeks to drag down insurers to make the case for run-on strategies.
In our defence, I would say that we shouldn’t lose sight that pension buyouts are genuinely ‘good news’ stories. When a pension scheme buys out, a number of fantastic things happen:
- Members receive enhanced security; their pensions move from the more lightly regulated pensions regime to the safety of the prudential insurance environment. Their administration also moves to a customer services platform building for the future.
- Trustees settle their obligations and fulfil their fiduciary duties to their members.
- Companies draw a line under these historical obligations, knowing they have secured them for the long-term. This enables them to focus on their core businesses and importantly, the future.
- The added bonus is that we, insurers, are investing productively at scale, making a real difference in our towns, communities and economy through the investments we make to support our pensions businesses.
It is great that trustees and companies have more choice than ever before, but equally we shouldn’t overlook that buyouts are genuinely win-win-win-wins for members, trustees, companies and for our wider economy and society.
The most interesting aspect of this is that Mr Towner felt compelled to write this!
He doth protest too much, methinks….
On the central point, you’re right Henry, people want pensions. I don’t recall any of the 28million auto-enrolled voting (or even being asked to vote) for DC, and I’m not aware of many of the14million DBers in the public sector rushing to DC. That the current model suits the financial institutions is because they view pensions as financial products.
Endgame and Gold-standard are wonderful PR slogans of the ABI, but does nothing whatsoever to deliver more pension to working people. The current de-risking approach is killing the economy. That current hegemonic model is clearly broke. We need to go back to first principles where pensions are an integrated diversified investor in the economy, feeding and nurturing it to deliver growth essential to pay pensions.
Thanks Mr Jnamdoc. If only I could put it as well as you do! Thankfully you are now on my rehabilitation team and with some more comments, I may be able to express my feelings as you do- they align!
An annuity IS a Defined Benefit pension.
While John Towner points out the costs and risks of running on a sponsor guaranteed pension, the insurer builds those costs and risks into the purchase price. Con Keating points out https://henrytapper.com/2024/10/10/bulk-annuity-value-risk-transfer-con-keating/ that based on TPR’s Tranche 17 (T17) analysis, insurers price the bulk transfer at between 130.9% and 138.6% of the best estimate of the assets required to run on the DB scheme. My own analysis indicated a similar relationship between solvency and neutral valuations in 2023/24.
Is a scheme fully funded on a solvency basis not equally equipped to weather the risks and costs which John highlights? After all the assets are retained in the Scheme for the benefit of the Members and have not been distributed to shareholders with a £200M share buy-back and a 9.5% dividend yield.
The sponsoring employer of the DB Scheme also gets a dividend from the surplus in the form of an interest credit to the Pension Scheme costs reported in their P&L A/c and EBIT (whether or not they have applied a ceiling to the asset value reported on their Balance Sheet). Further if they keep a DB Scheme open, the surplus can be used to reduce the future cash contributions through a partial contribution holiday. A benefit not available if the current pension promise is to a defined contribution.
We await Mr Towner’s response.
That’s cruel Jnamdoc, you know how difficult it is to make a comment when working for L&G.
I think you are becoming the sales manager for the pension industry, a job I would like to help you with, When I recover, you and I will have a wonderful party, with alcohol but with an understanding of how things will change (thanks David Orford for encouraging that from Australia!)
I could not have put it better jnamdoc & Pension Oldie. John Towner talks of the lessons of the last twenty years, a time dominated by a financial crisis (2008) and quantative easing (2009-2022) which grossly distorted the market and inflated regulatory funding aspirations, followed by LDI a strategy to minimise Corporate accounting fluctuations.
Insurance (aka Annuities) is about management of risk, with associated underwriting reserves. Pensions (Pension fund trusts) is about delivery of a stable income for the remainder of a retired persons (& spouses) life. Between the ages of 60 to 85 the uncertainty of living another year is relatively low. It only when one heads to the 90’s, that the uncertainy becomes significant, and if relying on your own resources insurance is a sensible option.
Andrew Smithers in his book the Economics of the Stock Market has researched Stock Market returns over the long run (1801 – 2018 US Stock Market) and concluded the average real return over inflation was 6.7% pa on a fair value mean return reverting basis. If a pension fund were invested over the long term 50% real return assets and 50% no real return equivalent to a combined yeild assumption of gilts plus 3.35%pa, funding a pension rather than an annuity would be at least 30% lower in cost. Meaning a trust based pension should be a no brainer at scale!
If a scheme is funded to the 99.5% certain level. the insurer faces just 0.5% risk of a loss which may perhaps average 5%, so a risk of £2.5 and of course 99.5% of the time makes a profit which averages a little more than the difference between the 99.5% value and the best estimate of liabilities, or about 31 % (see above comment) – say £30 . Those are insanely positive odds in the insurer’s favour.
Yes, that’s why I’ve been buying insurer equity. It’s a pity so many are PE or not British owned, while others siphon (sorry, re-risk) much of the profit offshore:
If you can’t beat ’em, join ’em.
Hi Henry – I apologise for the late reply. I was away for the holidays and only came back this week. I hope you’re having a good start to the year, and hope your stay in hospital wasn’t too bad.
Thank you for prompting the debate, and thank you to everyone who has contributed to the comments.
You make a very fair point. I agree that if a company is willing to run-on for surplus, there are potential advantages, such as being able to enhance members’ benefits and/or for the company to top up their employees’ DC pots (or use the surplus for other purposes). In fact, where there is a surplus today, these kinds of considerations often come into play in a buyout.
There will certainly be many companies that are comfortable with the run-on approach and believe that they and their trustees have the right tools, governance, risk management and advisors to do it in a way that is safe and secure. Equally, there will be companies that believe this activity is not core to their business, do not have the tools to support and do not want to take the risk of undershooting. The overarching goal of my LinkedIn piece was simply to put forward the positive case for insurance in this context around member security, trustee duties, company obligations and productive investment, but your perspectives got me thinking more widely.
I’d argue that pensions are insurance. At the individual level, whether a DB pension or an annuity, it is insurance against the risk of living longer than you expect. This risk becomes most pertinent at old ages (a point made in another of the comments). At the bulk annuity and pension scheme levels, it is insurance against the risk of a scheme’s membership living longer than expected on average, which can be more pertinent at younger ages. It might be the risk that medical advancements, say, cause a change in life expectancies. In addition to insuring against longevity risk, bulk annuities also insure against adverse outcomes for the other risks associated with providing a pension for life, such as asset and expense risks.
As you say, more ambitious pensions can be achieved, but there must be a cost to that somewhere. There is never any free lunch. Where the cost is less benefit security for members and/or more risk to the sponsor, it can often be overlooked or underestimated. In some of the run-on versus buyout debate, I sense this is sometimes ignored when putting forward the case for run-on and the focus is on the upside without comparable consideration of the downside.
All this said, I return to my initial point that for some companies and trustees, they will be comfortable underwriting the risk, while for others, they will want to pass it to an insurance company. I would, of course, argue that insurance companies are best suited and have the best tools to deliver and safeguard these promises, but I do take your point that many members will have an affiliation with their employers.
Either way, I’d say it’s definitely an exciting time for the pensions industry, and it’s fantastic that member security is much higher today that’s been for a long time. After decades of seemingly endless challenges being thrown at trustees and sponsors, it’s refreshing they have a new set of positive options to consider.