I cannot say I am impressed by the Linked in post from Rachel Reeves, I do not see the Bermuda based arm of Brookfield as a good owner of Britain’s pensions.
I side with the comments of Jnamdoc, the mysterious commentator on this blog.
Response to Just Group privatised from over the water to provide “workplace pensions”
jnamdoc says:The loss of players from the UK stock exchange is sad but is a secondary matter. There is a colossal financial scandal playing out under plain sight.
The £2.4bn for Just, and the £5.6bn for PIC are clear demonstrations of the super profit in the Pension Insurance sector – these are super smart financiers and they’ll want their payback, plus some!
But remember that the reward or payback to the foreign shareholders for every penny of that £8bn of purchase price can only come from one source – from the excess from massively overfunded legacy UK DB schemes. Think about that for a moment..,
If there was any moral justice then that £8bn, or at least a lion’s share of it, could and should be used to provide better inflation protection to the DB pensions of the many thousands of mostly low paid UK pensioners, and / or to augment NOW those DB pensions. Aside from the moral case, addressing the cost of living crisis for pensioners, the multiplier effect from any current augmentation would provide a very significant fiscal boost.
It’s now more widely understood that for each £1bn of DB pensions that gets gobbled up by the Insurers, the excess funding and expected (very low risk) embedded profit is circa £200m. That’s at least a 20% uplift that could and should be used to increase the pensions for many UK pensioners!
The previous opacity and financial wizardry around the insurer regime and its careful drip feeding of profit visibility over many years has been blown out of the water by these multi-£billion acquisitions – the Insurance sector is cashing in their £bn chips right now.
We have the tools and the knowledge about what is happening right under our noses, and really could do with a Regulatory regime (and a Minister) that finds its teeth to put member outcomes FIRST.
It’s really not that complicated – for each successive £1bn of fully funded DB scheme, should Policy be supporting that the surplus and expected excesses of +£200m goes to ‘the market’, or, the pensioners?
It’s bizarre we’re even having this debate.
The bigger play explored by the Financial Times
Like Jnamdoc, the FT is not so sure that the move on British pensions is in the best interests of pensioners.
While private capital providers and insurers do have some synergies, tie-ups are not devoid of risk. For one, private credit is a new and growing sector, and its resilience in a downturn has not been tested. What’s more, insurers will tend to invest policyholders’ money in assets originated by their parent.
There are ways to manage the risk this creates — think special committees, endless assessments and the use of consultants to validate the price at which assets are transferred. But the biggest safeguard is a sharp-eyed regulator. Now that this investment trend has landed in London, the Bank of England will be training its sights on the sector to make sure deals that are beneficial for the acquirers are good for their new customers too.
In their acquisition document published by the London Stock Exchange (where Just is currently quoted) is a further reason for a “sharp eyed regulator” to act as a “safeguard”.
The Acquisition positions Just to maintain its offering in individual annuities while enhancing its ability to capitalise on evolving retirement trends, including the growing opportunities in defined contribution pensions, with £1.3 trillion in UK defined contribution assets projected across 14.9 million active savers by 2044.
The Combined UK Group, with the support of BWS’s balance sheet and expertise in individual annuities and wealth solutions, will be able to reinvest capital strategically in these key growth areas.
It is not just DB pensions that Just (BWS owned) will be after, it will be DC pensions which Brookfield hopes will be locked down and eaten up by its predatory insurer – now owned by smart financiers from the other side of the pond.
I think the private capital versus listed issue equity goes wider than just insurance. Listed companies are increasingly releasing surplus cash by share buy-backs designed to bolster their share price and thereby reducing funds that would be otherwise invested in future developments in the Company, e.g. R&D, acquisitions etc. but also increasing p/e ratios. This benefits investors selling their shares at the expense of investors operating on a buy and maintain basis.
As the London market had traditionally been dominated by investors, such as pension funds, operating on a longer term basis the p/e ratios in London, particularly for technology stocks but perhaps increasingly for financial stocks, have been lower than in the US. This puts them at a disadvantage as a source of capital for those companies wishing to raise capital to fund future developments.
Private capital removes the pressure to protect the share price, allowing the owner the freedom to allocate the cash that would otherwise be used for share buy-backs to fund either future developments or a smoothed annual dividend flow. While this is currently particularly affecting the London market, the US market is not immune and is becoming increasingly dominated by stocks with high p/e ratios supported particularly by private investors targeting capital gains in the short term, but also through index tracking funds.
Perhaps trustee boards should consider this when deciding how much and how to invest in equities.
There’s an argument, popular among professors of financial economics, that share repurchases are the same as dividends.
If a company buys back 5% of its shares, the result will be the same as a dividend equal to 5% of the company’s equity market capitalisation.
This myopic principle applies regardless of the relative valuation at which shares are repurchased.
Don’t buy that.
As investors, pension trustees should think about share repurchases the same
way they (should) think about share purchases: they’re more attractive, the cheaper the share price, but less and less attractive at higher and higher valuations.
Under IFRS accounting, share repurchases almost invariably boost returns on capital because the amounts spent to buy back shares are deducted from shareholders’ funds.
Share repurchases also boost earnings per share (EPS).
There is a better way, if only accounting standard-setters could get their heads out of their financial economics textbooks.
Companies should be made to carry repurchased shares on their balance sheets as a self-investment, not deducted from shareholders’ equity.
In another departure from current IFRS, companies could use the equity method of accounting to continue to consolidate the proportion of earnings attributable to the shares repurchased.
Dividends, on the other hand, are incompatible with executive share options.
Options give their recipients an interest in increases in the capital value of a company’s shares above the strike prices of the options.
Dividends reduce the capital value of a company’s shares and thus don’t appear to suit the interests of option-holders.
There is a solution to this conflict too.
Reduce the strike price of
executive share options for the value of dividends paid.
This would align option-holding executives with long-term shareholders, in
deciding the best ways to distribute capital by either share repurchases or dividends or a combination of both.
There remains a problem that paying dividends conflicts with executive remuneration incentives tied to EPS growth.
IFRS accounting flatters the economics of share repurchases, so executives find it in their self-interest to get their company boards to repurchase shares, since this usually improves EPS.
Such a conflict suggests it would be better, not to limit the scope for paying dividends, but to get rid of EPS as an incentive metric.
Remuneration policies and incentive schemes should instead reward a combination of growing operating profits, cash conversion and return on capital.
As for shareholder approval, corporate lawyers should be able to draft rolling AGM resolutions for dividends, as they already do for share repurchases.
While we’re at it, the standard wording of those share purchase resolutions could be beefed up to more than mere reference to the current share price, to add wording about the necessity for repurchases to represent value for long-term shareholders. Accounting for repurchases as an investment, subject to revaluation or impairment, would also bring more boardroom discipline to bear.
Finally, it’s said short-term equity traders welcome share repurchases at any price, for the front-running opportunities they offer.
Long-term shareholders, engaging with executives and non-executives to get across their preferences on dividend and share repurchase policies, need to recognise this competition with other shareholders, of the short-term and/or passive variety.
Hello Henry,
Perhaps I am missing something, so I’ll write it as a question to the Rt Hon Rachel Reeves.
These people are reportedly based in Bermuda. Is it not likely/possible that when they come to draw their profits from this UK business, that by some clever Accountancy, they will be able to do so without being liable to UK Tax?
Kind regards,
Tim Simpson
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