This blog demonstrates the two parties promoting two quite different propositions to pay retirement income from DB pensions. In the first part of this blog I quote Charlie Finch of LCP and give access to a speech by the PRA last week to BPA providers.
In the second part of the blog, I give access to the DWP’s thinking about paying pensions from DB schemes. I also include the TAS300 instructions from the FRC and behind them the IFoA. I would like to see a fair discussion focussing on the needs of all parties to a pension (those who sponsor them, the fiduciaries and of course the members). It makes sense to have statements from the Pension Minister and the PRA on one blog. We need to be clear the different approaches.
Overseeing BPA growth safely – Speech by Gareth Truran
Given at 22nd Westminster and City Annual Bulk Annuities Conference
Pension Minister’s response to work and pension select committee (WPC) recommendations
“While we are making positive changes through these already announced reforms, we want to go further. Reflecting on the Committee’s recommendations, we will explore ways to strengthen trustee capability and governance, to ensure we safeguard member benefits and maximise economic growth in a consolidated landscape.” – Torsten Bell – Pension Minister
Bold type is from WPC, italics from DWP/Minister
Recommendation 2 – One of the opportunities is to support DB schemes to remain an active feature of the pensions landscape, helping to deliver adequate retirement incomes.
Recommendation 4- Those responsible for running DB schemes have long expressed concerns that the Funding Code would force them to de-risk unnecessarily, increasing the costs to employers and resulting in their premature closure.
Recommendation 6 – Many trustees and scheme sponsors will want to enter an arrangement to buy-out scheme benefits with an insurer, and we welcome the security for scheme members this provides. However, not all will be able to do so, at least in the short-term. Well-funded schemes should also be supported to run on as there are potential advantages for scheme members, sponsoring employers, and the economy.
As part of its work to take account of financial stability considerations, TPR should monitor trends in demand for buy-out and its alternatives and work with financial regulators to understand the implications.
Recommendation 7 – ensuring pensions are paid in full when surpluses are being distributed
There is sufficient evidence of improvement in the funding position of DB schemes to justify a new policy approach. However, it is imperative that there is no return to a world of deficits. Policy changes therefore need careful thought so that they grasp the opportunities offered by improved funding levels, while being agile enough to respond to future challenges. One of the opportunities is to support DB schemes to remain an active feature of the pensions landscape, helping to deliver adequate retirement incomes.
Recommendation 11 – find ways for Trustees to invest DB assets in more interesting companies
We welcome confirmation from TPR and Ministers that the interests of pension savers are paramount and that investment decisions are for trustees in line with their fiduciary duties to act in the best interest of scheme beneficiaries.
The Government should continue to work with the industry to create an environment that supports investment in the UK economy.
Here are my three blogs
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The Work and Pension Select Committee have published a report on DB pensions which is the first under a Labour Government. Here it is to read and here is the link. There is plenty in the Pension Minister’s foreword that we no already but Torsten Bell is keen that Trustees can invest for growth without…
henrytapper.com
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This is the second of my reviews of the Government’s response to the report below,the WPC’s authors are listed in this photo The Work and Pension Select Committee have published a report on DB pensions which is the first under a Labour Government. Here it is to read and here is the link. The…
henrytapper.com
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This is the third of my reviews of the Government’s response to the report below. I’ve got as far as recommendation 10 without finding one which bored me but here (later in the response) I find some of the recommendations are a bit thin, I’ve brought together those targeted at helping trustees do their job (for instance).
henrytapper.com
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TAS 300 (V2.0) Section 5
Bulk transfers
5.1. Practitioners providing advice to a governing body or an employer which is considering a bulk transfer must consider the following:
a. credible alternatives to the potential transaction for the long-term provision of members ’benefits. Practitioners must consider whether the following alternatives are credible: a bulk transfer to a superfund or an insurer and retaining the liabilities within the existing pension scheme potentially with additional funding and/or security.
b. any material impact on the protection provided for members’ benefits in the event that the benefits are unable to be paid as intended;
c. any changes in the material risks to the benefits of the different classes of members; and
d. any changes to the governing body’s ability to make decisions which affect the level of members’ benefits.
5.2. Practitioners providing advice to a governing body or an employer which is considering a bulk transfer must use as much relevant information as is sufficient and must make use of support from third parties where they judge it necessary in order to obtain sufficient relevant information. Practitioners who have relied on input from a third party should understand how the input affects the output of their technical actuarial work.
5.3. Practitioners providing advice to a governing body or an employer which is considering a bulk transfer to a superfund must, when advising on the affordability of a buyout of the pension scheme, at the time of providing the advice and in the foreseeable future, use assumptions in relation to buyout pricing which reflect current and anticipated future market conditions and insurers’ practice.
5.4. Practitioners providing advice to a governing body or an employer which is considering a bulk transfer to a superfund must ensure that models used are calibrated appropriately to/reflect the time horizon of projections
Communications
5.5. Practitioners’ communications must include sufficient actuarial information to enable the governing body or other decision-making entity to understand the range of options available for the long-term provision of members’ benefits, and how different classes of members might be affected by a bulk transfer. The information provided must include the items listed in 5.1 where material
5.6. Practitioners’ communications should state any third-party assumptions, data or methodology on which they have relied.
5.7. When performing technical actuarial work for the purpose of enabling an intended user to form a view on the likelihood of members receiving full benefits following a bulk transfer to a superfund, practitioners’ communications must ensure that the intended user is made aware of all material risks and other factors relevant to this view including the change in the covenant.
5.8. When advising on whether a bulk transfer to a superfund meets the TPR gateway tests1 for such a bulk transfer, practitioners’ communications must include an explanation of the uncertainty in the actuarial information.
My own personal view is that a bulk purchase annuity is an investment decision by the pension scheme. Like all other investment decisions a bad investment may be a good investment bought at the wrong time (or one sold at the wrong time).
The problem from the pension scheme / employer / members point of view with a BPA is it is one single permanently illiquid investment decision where timing losses cannot be recovered. This goes against the fundamental principle of trustee investment that of diversification.
There are also any timing loses on the required sale of other investments required to fund the BPA to be considered as well as additional employer contributions (or the possibilities of future refunds to employers and the cost of pre-purchasing member benefit improvements). Would there be benefit in waiting – or perhaps as now being suggested by the DWP in running on the pension scheme, or the sale to a consolidator, or even (as used to be the case) to a new employer?
A substantial proportion of the loss of assets from private sector DB pension schemes in the last 10 years arose from attempts to fix the price of a BPA at entirely the wrong time when (to me at least) it was blatantly obvious that the investment was over-priced, being based on the assumption of a negative gilt yield. The scale of the losses in the WH Smith Pension Scheme now being discussed are one example, I only hope the corporate transaction that was predicated on the “sale” of the pension scheme will prove beneficial to investors.
It is unfortunate that the term LDI became corrupted by the risk transfer salesmen to be an attempt to match the current price of a BPA represented by the gilt yield and that this was encouraged by actuaries and TPR’s unflinching use of gilt yields in the valuation compounding liabilities and comparing that value to the market value of dissimilar assets. As I understand it, and John Ralfe may care to correct me, the original objective of LDI was to match the annual cash outflow of the benefit payments with cash inflows from interest and redemption payments from bond type investments. This is a world away from an attempt to match the current price of a single investment.
A bulk purchase annuity buy in priced in current market conditions may or may not prove to be a good investment, but if the scheme is sufficiently well funded to purchase a BPA priced on a gilts basis why not just hold the gilts themselves? That would provide future flexibility with scheme experience and future investment opportunities for member benefit improvement and a possible return to the employer, preferable in the reduction of the cost of pension provision for present and future employees! You might even find that a pension scheme could be a company asset!
What will do more for economic growth: the generation of profits for the BPA insurers booked immediately and distributed to shareholder’s by way of dividends or share buy-backs; or the long term investment in gilts, bonds, and productive assets by the pension scheme and the potential increase to members’ retirement incomes and the reduction in the sponsor’s employment costs from thoughtful investment?