“Pens down on risk transfers”, trustees and consultants urged at Mercer Conference.
At the Mercer Risk Transfer Conference (Tues 11/02) in a debate with life insurers Rothesay and Just, Con Keating and William McGrath argued that bulk transfers are a waste of money.
The level of derisking of DB schemes has proved a costly mistake and has damaged the UK economy and misallocated resource. Con Keating has calculated that of the £300bn of pension special contributions since 2000, all but £53bn was down to the more stringent calculations used for scheme funding than the basis used by life insurers. This has massively distorted the UK economy. Now, syphoning £50 billion a year in cash from UK schemes to largely foreign owned life insurers and reinsurers is an approach not justified by the maths. That maths is now required by actuarial regulation TAS300V2.
Keating and McGrath argued the financial best interests of scheme beneficiaries and of sponsors are served by looking – as required by Government and regulation – at Credible Alternatives to bulk transfers. The Prime Minister and the Chancellor have called for “Concrete Proposals for Growth”. DB schemes provide the readymix to which Government and sponsors can provide effective additives straight away.
They told delegates that asking relevant questions on the maths of run-on v bulk transfer would lead to strategy resets. Meanwhile, it should be pens down on risk transfers. Don’t sign away the future.
Con Keating, of Brighton Rock, has noted LDI as being Lunatic, Daft and Idiotic. The damage caused to schemes is still emerging. Hedging the actuarial measure not the actual cash was a mistake.
William McGrath was a longtime CEO of Aga Rangemaster. Arrangements put in place when the business was sold in 2015 protected the pension scheme from excessive derisking and the sponsor from very high contributions. The scheme is now fully funded.
I think run-on is really only viable if you have confidence that the employer will be around long-term. Even if the covenant is currently strong, trustees need to consider if the firm will exist to back the scheme in 30, 40, 50 years?
Which is what trustees do informally or formally (since the Pensions Regulator introduced employer covenant reviews) and have done for some time.
Although 30, 40, 50 years out is a big ask.
Are you, however, familiar with credit rating agencies and their calculations of default probabilities, which remain very low, at least for employers with “investment grade” ratings?
It’s a rather exact science for something as uncertain, but it is another consideration.
eg https://www.spglobal.com/ratings/en/research/articles/240328-default-transition-and-recovery-2023-annual-global-corporate-default-and-rating-transition-study-13047827
And other rating agencies are of course available.