By William McGrath – CEO of C-Suite and once of Aga Rangemaster.

The impact of the Budget on DB pensions may prove significant – ending endgames as currently expected.  The numerical balance between run-on and bulk transfers tilts appreciably to run-on.  The exercise of discretion to make added payments to members becomes easier in tax terms.  Pension Protection Fund will in future provide inflation protection of up to 2.5% on pre-1997 service.  Actuaries have under Financial Reporting Council’s TAS300V2.1 P5 to compare bulk transfers with run-on.  Factor in these points alongside surpluses being more readily available after the Pensions Bill and strategies for many schemes should change.

The “relevant question” trustees are required to ask to meet their fiduciary duty is what is in the best financial interests of members.  The PPF safety net moves closer still to the life insurers’ FSCS.  Running on leaves open a value sharing upside.  Trustees should see at least protecting pensions from inflation above capped levels as a deliverable objective.  Where’s the beef?  It’s in a risk-benefit analysis and consultation with members.

A good question for trustees and sponsors to consider is, what is the increase required such that pensioners are always better off even if the sponsor collapsed and the scheme joined PPF.  And is a buyout for a scheme after a buy-in an upgrade if the stop loss of the well funded PPF goes with it?  Members should expect trustees to seek a run-on deal with sponsors and tell them how they got on.  It could even mean that life insurers respond by introducing value sharing arrangements to ensure they provide an attractive option.

The implications are wider economically.  If more schemes run-on long term so that discretion can be exercised steadily over time, there is scope for a clear tie in with more Pro UK investment strategies.  Further, Government can ensure more funds are directed over time towards UK growth.  Government could achieve this by removing the 10% pre retirement PPF haircut and introduce a FSCS levy for life insurers where their asset allocation does not have minimum Pro UK allocation.  No mandation; just economic self-interest and fiduciary duty.

So all stakeholders benefit with more of £1.5 trillion invested in the UK and discretion being used to up the £50 billion a year DB pension payments.  UK markets have liquidity with more buyers than sellers.  The Bell chimes as Government closes in on a big economic win.

Ask One Question

DB trustees and sponsors are one question away from better pensions for past and present employees and reviving the UK economy. “What is the risk-benefit of bulk transfer v run-on strategies for stakeholders given current Pensions Bill, new regulatory objectives and Budget tax changes?” Ask what FRC required TAS300V2.1 numbers show and the case for buyout collapses – unless there is an ongoing value share introduced for members. Surpluses made available; easier use of discretion; pre-1997 haircuts cut. Fiduciary duty of trustees and shareholder value for sponsors now requires a formal DB risk-benefit update.

DB Run On.  A Cog to Move UK Economic Growth

Schemes are encouraged by regulation to run-on long term and incentivised financially to raise UK productive asset allocations. Reinforce with Government arranged FSCS / PPF safety nets cost / coverage linked to investment strategies. UK markets have more buyers than sellers and will attract more investment opportunities. More of the £1.5 trillion backing UK DB pension liabilities is invested in UK productive assets.  Pensions increase.

How All Can Benefit from Eased Solvency Rules

Solvency II and Solvency UK rule changes opened a regulatory arbitrage and improved markets for life insurers.  TPR: Your move. Global fixed income funds, often Bermuda registered, are hoping schemes can be “palmed off” their very profitable way. UK regulators are worried they lose track of events on tropical islands.  Incentivise life insurers to bring assets home through a FSCS levy on assets held offshore.

Don’t palm off members To Bermuda in bulk

Members and sponsors can now help themselves and the UK economy by asking their actuaries and legal advisors to provide a FRC TAS300V2.1 update to incorporate in their TPR required Funding and Investment Strategy.  Maths counts.

And Government is closing in on a big economic win.

• More of £1.5 trillion backing UK DB pensions invested in UK productive assets and UK taxpaying companies.
• Increase to annual £50 billion in UK pensions stimulating spending and raising tax.
• More money coming into UK markets providing liquidity and stimulus to financial sector.

Sound the Bell; Beat the drum for the UK growth agenda.

What will accelerate progress?  “Scrutiny; Incentives; Members” summarises our proposals.