I’m a words man. William McGrath is a numbers man, I think we are both humanists, we value human happiness over corporate profits. So William has responded to my well read blog this week about Baker Hughes’s inhumanity with this powerful stuff. It’s number’s not words but that will drive the points on to parts words cannot reach – the brains if not the hearts of certain actuaries who think de-risking an end in itself. Thanks William for what follows.
The Lessons of Baker Hughes
Available information:
- Baker Hughes has a market capitalisation of $38 billion and an ‘A’ debt rating. Not a covenant risk.
- Baker Hughes is reducing current DC pension accrual rates.
- Baker Hughes has three UK pension schemes with an aggregate value approaching £830m and an accounts surplus (see summary below).
- Deals have been reached to transfer the schemes to Pension Insurance Corporation (PIC) for around £900 million. Press releases note deals produced in short timetables and the good work of the long list of advisors. No “Background To and Reason For” explanation.
- PIC has become immediately profitable and is selling out to Athora (Apollo) for £5.7 billion.
Questions arising:
- Technical Actuarial Standard 300 Version 2 requires bulk transfer v run-on comparisons by actuaries with workings made available to trustees and sponsor. What did it show?
- Will members receive discretionary payments benefits on a buy-in or subsequent buyout? The trustees are not powerless here. Their powers on a wind up means the company does not book the accounts surplus. What did the trustees ask for?
- Is a payment being made to achieve the deal following the contribution of £12 million in 2024? With a “run-on” plan could such a payment have been avoided? Would run-on provide cash to avoid cuts to current pension provision?
Actuarial work and pension transactions receive virtually no scrutiny. That is why there are such apparently sub-optimal deals. Members and employees of such schemes should get stuck in and ask questions. The impact of knowing somebody is watching will be positive for all stakeholders as light is shone in on actuarial magic.
A Proposal
Trustees undertaking pension risk transfer transactions should include a “Background To and Reasons For” explanation in press releases and member communications. This would align with what is expected of corporate transactions. Sponsor accounts should include summary numbers and an explanation.
IFoA, TPR, FCA and PRA can formalise a requirement. Members should put all involved on notice now that they expect it.
Most Pension Risk Transfers do not make economic sense for sponsors or trustees. Still they happen. Government wants alternatives. It’s time for the pension industry to come under scrutiny.
Time for scheme members and current employees to be activists.
The numbers
A £500m loss since they started their LDI master plan in 2021, while their equity holdings rose 20%. A bit of regret risk there no doubt – if only they’d stayed invested for the long term, like a pension scheme…
No one at fault of course, as the advisers will be no doubt say everyone was doing it, using group-think as a proxy replacement for actual investment advice.
Seems the same applying for this current exercise too…
Case study for a class action….
The immediate open question is what did they do in 2021/2022 that reduced assets and liabilities so much -this is clearly not just an over-levered LDI strategy., what prompted the reduction (sale) of some $200 million of diversified growth funds?
Trustees buying-in or buying-out DB liabilities are basically abrogating their responsibilities to the Members and the sponsoring Employer. They are saying we do not believe we can invest your contributions more efficiently than the insurer, despite the fact that that as Trustees we have much wider investment opportunities and unlike with the insurer profit extraction is not anticipated.
I agree wholeheartedly with William’s suggestion. I would go further and make it a statutory requirement and as it is urgently needed put forward an amendment to this effect to the Pensions Schemes Bill.
Look at the administration costs – rising from 6.3% of benefits paid out in 2018 to 11.5% of a larger figure in 2022 (11% in 2023). Were they all necessary and did they contribute to the Members’ experience?
How much should it cost to run a pensions payroll and maintain the membership records of a closed DB Scheme?
WTW led the BH transactions and CMS provided transaction legal advice for all three Schemes.
WTW is the Scheme Actuary, LCP are the investment adviser, CMS are the legal adviser, and Aptia are the administrator to the Baker Hughes (UK) Pension Plan.
Aon is the Scheme Actuary, administrator and investment adviser, Squire Patton Boggs are the legal adviser, and Cardano are the fiduciary manager to the Brush Group Pension Scheme.
First Actuarial provide actuarial, administration and investment services, and Irwin Mitchell are the legal adviser, to the Pipeline Integrity International (PII) Group Pension Scheme.
PwC provided financial strength advice to the three Schemes.
WTW and Baker McKenzie advised Baker Hughes.
PIC was advised by Herbert Smith Freehills.
Seems to me there are a few conflicts of interest in there?