Published in May 2022
There has been considerable response to last night’s blog Field called our DB pensions “an economic miracle”….Reeves knows why. It explains how a speech including a call to reinvest pension surpluses in company and economic growth.
It’s worth reading and if you haven’t read the blog, click this link– it was published last night to help the British public understand that the pensions that Field held to be a miracle only 20 years ago, are now being dismantled.
There is confusion in the pensions market with departments of major consultants arguing for and against the position taken by Chancellor Rachel Reeves.
While one team at Willis Towers Watson argued to Mary Mcdougall
Access to scheme surpluses could slow the pace at which pension funds have been offloading their pension obligations to insurance companies, with around £50bn of assets transferred in so-called bulk annuity transactions in each of the past two years, according to pensions consultancy WTW.
De-risking or re-risking? What’s going on?
WTW predict in this FT article something quite different. They predict a massive increase in de-risking in 2025
WTW does so a few hours after predicting a tightening on pension buy-outs as the Treasury demands re-risking.
WTW suggests that higher surpluses will drive markets up from £50bn to £70bn and last year’s disappointing year for buy-outs was in readiness for a bonanza in 2025
Forecasts for a buoyant 2025 follow volumes that were slightly lower than predicted last year as some employers decided to keep their schemes or delay buyouts, in anticipation of higher surpluses.
I do not think the insurers were able to do what they want.
My suspicion is that the PRA are getting a little nervous about the reinsurance that is stoking the Bulk Annuity Market
It is generally accepted that capacity was limited by difficulties with the PRA over the offshore reinsurance market. The PRA is effectively a part of the Bank of England.
It may be that the Bank of England’s PRA, like the Treasury, are asking questions of the pensions industry with its trillion + in assets. Are insurers investing in long term sustainable growth?
The bottom line is that Pension Bulk Annuities do not reinvest into the sustainable growth of companies, they invest in global bonds and assets that fit the needs of their shareholders, not the sustainable growth of companies or the national economy.
And this brings me to the very real questions that the FT work (based on Sky’s) asks of the regulators. It brings to question the PRA’s leniency on the Pension Buy-Out Market. It asks question of the work of the Pension Regulator.
Rather than encouraging investment, growing Britain with the muscle of pension investment- specifically the strength of the £1.2 trillion that still sits in DB pensions, the regulators have handed the market to the insures
Despite predictions to the contrary, de-risking was actually down in 2024 on 2023.
Is Reeves condemning the “de-risking” of pensions.
It is not just the Bank of England and PRA who may be feeling a little nervous. There will be a certain amount of nervousness at those parts of TPR charged with helping DB plans manage risk (rather than put pensions to work).
One of our senior pension commentators, a man who has worked for many decades keeping DB pensions had this to say last night
It’s worse than ironic that TPR is a regulator whose statutory objectives include business growth.
The Pensions Act 2014 introduced a specific business growth objective for TPR by amending section 5(1) of the Pension Act 2004 to say “in relation to the exercise of its functions in respect of Scheme Funding only, to minimise any adverse impact on the sustainable growth of an employer”.
TPR, who seem to like tinkering with statutory wording they may not like, interpret this as “making sure employers balance the needs of their defined benefit pension scheme with growing their business”.
Note the (un)subtle introduction of “balance”, the removal
of “adverse”and the relegation of “growing” to the end of the sentence.I also note TPR were NOT one of the regulators summoned to a recent face-to-face with Rachel Reeves to discuss ways to improve business growth.
Maybe Rachel Reeves will on Wednesday coming call TPR (and others) to account for what they have been up to these past ten years?
“ Insanity is doing the same thing over and over and expecting different results.”
Its been more than dispiriting the last 20 years watching the life being sucked out of an economy from the TPR/DWP induced death spiral of dis-investing (or derisking) of a couple of £trns of (a the once envy of the world) DB system.
Hopefully sanity (and open government) will prevail before we complete the final step of economic suicide in handing over the residue of major levers of our investment system to a small handful insurers, who’ll largely look to re-insure the ‘risk’ offshore.
The mere fact there is such a feeding frenzy of some £50-£70bn per annum risk and wealth transfer would, you think, cause someone with a Policy responsibility to at least press pause on this lunacy…..
Jnamdoc, you are increasingly influential! Let us hope that your and others comments are read, they make sense of the blogs!
I understand the PRA issued a letter on the 9th January warning insurers to very carefully consider their pricing of bulk purchase annuity transactions. The implicit assumption being that current pricing models (widely assumed to based on gilt yields) may be too low leading to riskier investment practices, particularly referencing funded reinsurance.
If risk transfer transaction costs rise, will advisors to pension schemes be able to suggest that buy outs reduce the risk to the employer, who in most cases retains the residual obligation to meet their pension promise, irrespective of whether the pensions are being paid by a pension scheme or an insurer.
That’s the paradox. The pricing can be enticing on a single scheme basis, but when implemented on a system wide basis, the enormous scale of it (ie disinvestment in pursuit of de-risking) undermines the economic bedrock, imperilling the payment of all the pensions, regardless of where the risk has been transferred to.
Policy makers need to deal with this.
Systemic risk is often discovered with the benefit of hindsight. It is rare for Regulators to act with foresight. It often requires independent thinkers who have that foresight to spell out the systemic risk that may be occuring, as those who profit from the status quo have no incentive to change direction.
There is an opportunity for a “pensions strategy” review and a change of direction at policy level with Torsten Bell in the hot seat, but Torsten will need to be clear on his objectives. Get it right and “pensions” can have another golden age. Get it wrong and our children and grandchildren will pay the price.