Pension Oldie is a veteran of this business and speaks with the authority his moniker grants him. It is another little master piece from someone who clearly has been through annuity purchasing

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?