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.