This time last year I was reading about 2024 being a bumper year for buy-ins and buy-outs. The link’s to an excellent WTW report which is partially a marketing document for the months to come. It was published in January 2024. This January I am reading about how the back-end of the year saw the cost of swapping pension funds for bulk annuities go through the route. The result has been lower levels of buy-ins and buy-outs and a new interest in providing pensions (as was originally intended by sponsors and trustees when the schemes were set up.
Instead of WTW, I have read a difficult report on what is going on to make it difficult for trustees and sponsors to say yes to offers from insurers. Here it is . Schroders talk about something called the Z spread. I don’t know why but what it tells us is the increasing cost of buying insurance companies debt (including equity release and other products we may have heard of) relative to the selling price of 10 year gilts (which are falling fast).
Anyone who is listening to the news on Rachel Reeves going to China, will hear that the Telegraph readers (what I consider financially sophisticated conservatives) want Rachel to stay at home and prune the garden.
The Schroder report implies that the cost of switching from pensions to annuities is increasingly expensive. There are a few schemes that have gone ahead (like Compass) but not many.
This should please the Chancellor and the Pension Ministers whose mantra is “growth”! Let us remind ourselves that pension schemes that Buy in and then Buy out are decreasing demand for gilts (which HMT needs to see bought and not sold) and decreasing investment in long term assets (equities and the ownership of productive infrastructure).
Far from “de-risking”, the promised move of DB into bulk annuities would have resulted in a disaster for Britain. This is what Rachel Reeves is telling the world. She is looking for what Mark Carney called gilts reliant on the “kindness of strangers”. We are looking for China as a source of kindness. It goes beyond gilts – Reeves wants to see growth and I hope that Emma Reynolds (one foot in DWP , one in HMT) is thinking about the implication of “de-risking” of pensions.
If we want to see DC delivering growth , then it should be getting the surplus from DB. This DB is not quite what TPR claim- closer I suspect to the 94% funding suggested by PPF or the lower figure of ONS. Whatever the overall figure, there are schemes that have surpluses and companies that fund DC pensions along with DB plans.
The solution is to allow DC to be funded by DB and for provident sponsors to be spared the demand for increased DC contributions which is coming from the commercial master trusts and the “WEALTH” industry.
My view is that redistribution of DB wealth should help the 60% of British workers who aren’t worrying about IHT or working out how to get Pension Credit. Winding up DBs schemes into bulk annuities is closing down the door to pensions and denying us national growth and demand for gilts.
I am sorry this sounds a little simplistic. Having read the Schroder’s paper I thought something right for the 60% was due. You will be aware that I am recovering from brain damage but I hope you agree with me that those who take decisions on DB funding are taking a different view – it is a better view and it should be publicised.
