Confused?

This is not a blog about state pensions or the pensions paid to people in the public sector like the NHS and Teachers, it’s for all the people who depend on the private sector though many people currently  in public sector pensions may be interested!

Those who are not familiar with the financing of private pensions may be a little confused about who can finance an income to the end of time (your time on earth). This is what we call “pensions” in the loosest term and I’ll make it clear how pensions are paid and how they are promised without being guaranteed “socially”.

There are two types of being guaranteed an income to the end of your life

Insured guarantees – annuities

Guaranteed pensions have a fall back if the sponsor of the guarantee fails, when the guarantee comes from an insurer the income is called an annuity and if the insurer fails the FSCS (Financial Services Compensation Scheme) will pick up the payments.

There are two types of annuity we need engage ourselves with, there are individual annuities bought by the person wanting an income and this annuity is underwritten, meaning you get treated for your age , postcode (where you live) and usually your health at purchase.

The other type of annuity is called a bulk annuity and is used by those running pensions (trustees) to buy out all or some of the present or future pensioners they have responsibility for. These are generally not “underwritten” but people are averaged in terms of where they live and how healthy they are as part of a group. Normally a bulk annuity buy out a promise made by a sponsor but it can be paid out to someone insuring their own lives – “insuring we don’t live too long”.  In future some trustees running DC workplace pensions will buy-out people when they get to a certain age (Nest say they will use a bulk purchase to buy people who who have pots with them and make it to 85).

For the most part, people with pots rather than pensions do not get bought out and have to make their own way home.

Pensions guaranteed without an insurer.

Where there is not an insurer involved in a guaranteed pension, the pension is guaranteed by a “sponsor” and if the sponsor fails, the the PPF (Pension Protection Fund) will pick up the payments.

Typically, these type of pensions are guaranteed by the person you worked for and are carefully regulated by the Pension Regulator (who don’t check annuities- they’re checked by an offshoot of the Bank of England – the PRA).

But sometimes the employer decides to pass the responsibility to an insurer. This is referred to as part of the “end-game” as it leads to the sponsor having no further obligation, typically an insurers “buys-in” and then “buys the pension out”,

One alternative for the employer is to club together to reduce costs and join other such schemes – this type of pension is known as Defined Benefit and clubbing together is a defined benefit master trust, It can be more efficient than running the scheme for the employer (especially if small) but it doesn’t get rid of the liability of their not being enough money to pay the pensions. It is only a partial transfer of risk.

A more complete transfer that doesn’t involve an insurer is to invest the pension fund in what is called a “superfund” where the new sponsor is not am employer but a capital buffer that acts like an employer allowing the scheme to run on without being insured. This is a nascent market, there is only one declared superfund though another superfund is looking to join in.  There is a simpler way of running on using capital to act as a backstop and this is known as a capital backed journey plan and this is being talked about tomorrow (Tues 0/12/25) on Pension Play Pen. This is so like a superfund that it works under regulations set out by TPR (though the legislation is not fully in place).

Finally there is an innovative type of risk transfer where a sponsor agrees to take on the liabilities of the pension scheme without putting up capital (so not a superfund) but with the possibility of having to stump up money if there isn’t enough to pay pensions (so providing a pension voluntarily). This is what has happened between Stagecoach and Aberdeen , two companies who have simply come to an agreement with the agreement of the Pensions Regulator. For the members of the pension scheme, the guarantee now comes from Aberdeen rather than Stagecoach and the PPF still sits behind the guarantee.

Finally pensions promised without being guaranteed.

There is another way of paying pensions which is not offering a guarantee to members of a collective scheme. This is known as collective defined contribution. Here the employer pays into the pension a defined contribution as part of pay but does not guarantee, no insurance company guarantees as there is no insurer, the promise is mutual between the members whose money has been saved into a pot from which pensions are paid at a rate depending on how the pot has “done” – done being grown or fallen in value.

This is not the same as DB and its not the same as an annuity, it is a social club of savers with its operation being managed by an organisation known as the proprietor and trustees who make sure that things are done properly. This type of scheme is new, there is only one but there are likely to be more from the end of next year and there are plans to convert more DC plans that currently pay pots and not pensions from 2028/9.