John Towner is in charge of L&G bulk annuities and you might expect me to take issue with him as I see bulk annuities too often as value destroyers. I have written recently of my disproval of L&G for creating the phrase “pension annuity” which is used to promote their individual annuities (and confuses two radically different ways to do the same thing).

The insurance view of their job is to put up a sign like this one (which adorns a recent Linked in article by John (mentioned below). It tells an employer and their trustees that a pension is finite whether it attends in an annuity where an individual is taking the choice or bulk annuity (for an employer or trustee). It’s alluring but it’s not what we need from a pension system. Here is what John has to say, some of which I’m happy with. I’ll throw in my comments and DE italicise and use the blue colour of a blue sky!

I hope that I can change John’s mind. He has had a grand career so far, grounded in an education in Liberal Arts and Arts History. Did they think of finishing lines when Cambridge started 600 years ago! USS is running as an ongoing DB scheme because current members believe their universities have as long a future as they’ve had a past

There is hope for John yet! I’d love to go back to his college and remind him of this!

Thank you for prompting the debate, and thank you to everyone who has contributed to the comments. Thanks to you – I enjoyed reading your comments. I hope your view will change!

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. But the surplus in a bulk buy-out or in is restricted to what is left over after the insurance guarantees are paid for. You are either tethering the horse (buy in) or sending it to the knackers yard. 

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. This is true, most executives will look at the horse and consider its value over. They will not see the foals borne to the horse and pay no attention to the loss of a possible pension for generations of horses – yet to be borne.

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. Maybe it got you thinking that many companies plan to be employing people indefinitely, they do not offer signs at the gates saying “finish line ahead”!

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. I think that pensions provide assurance that money will be paid with certainty to the pensioner (and perhaps to the family after) but they promise more, they assure and they look to provide pensions for those who have not started drawing. The older horses can enjoy watching those coming behind them having a later life in a paddock.

As you say, more ambitious pensions can be achieved, but there must be a cost to that somewhere. There is never any free lunch. I am sorry but I would disagree. I am enjoying the free lunches bought for me by investing my savings rather than squirrelling my money away in risk free cash pots or in gilts and bonds which behave in a way I don’t understand. I want to benefit from the long term growth of the economy and not protect myself from short term borrowing costs (as we’re experiencing now).

The concept of money being made at no cost to society is what “growth” does. We are growing richer as a society because of greater productivity and that growth in productivity is not created by putting up signs saying “finish line ahead”. For people as for horses – we are part of the long run for generations ahead and that is why we invest to last in pensions rather than in short term projects – as annuities do. I was shown round a housing development funded by insurance monies and annuities. 20 years in and the houses are falling apart, it will survive for this generation but not future ones.

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. If we considered the future without an optimistic bias we would believe that life beyond this century was not worth considering.

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. Many will consider themselves part of a pension that their children and grandchildren will enjoy. Unless we take away pension culture and replace it with a “finish line ahead”

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. Here I challenge you John. Insurers are not offering a new set of positive options, instead a way to de-risk not just the business but its vision for future employees and for the creation of surpluses as has happened in the past. If we are simply focussing on the “endless challenges” of DB, then we are taking a very sorry view of the past and the future.