PPF cover has increased significantly. Key questions for DB stakeholders
- What payment or increase means a member is always better off financially even if the scheme joins PPF?
- What is the probability of sponsor failure over time? Would my ring-fenced scheme be financially independent?
- What does severance do for me? (press link to download fuller exploration)
We need to know these answers to address fiduciary duty, surpluses and severance in risk-reward assessments.
And Government knowing the answer should propose that a scheme with minimum holding in UK gilts and productive assets will not be subject to a 10% pre-retirement hair cut even if it joins PPF (other incentives are available).
The C-Suite Step Up-At Risk Calculator illustrates these are the key starter questions. (press link to download fuller exploration)
Then when you decide to come off the economy killing Gold Standard you can join the Growth Alliance.
Coming off the Gold Standard
The overall pension sector is a long standing fan of buyouts for DB schemes – commentators like FT (and Lex in particular) have gone with “derisk and get rid ASAP” for sponsors.
Since 2018 we have pointed out that for members, run-on beats buyout and can do so for sponsors.
Now with interest rate rises, funding calculations look better unless you fell for too much leveraged LDI. Surpluses are becoming easier to access. Run-on looks a good option.
Meanwhile, the “complete security” of BPA’s “Gold Standard” has lost carats. Solvency UK, the rise of reinsurance, funded reinsurance and matching adjustment extensions are concerns. Worth a time out before pension risk transfers, particularly at a time when FT is repeatedly raising concerns about US insurers.
It is certainly worth considering whether FSCS would work in practice. Would there be a payment hiatus while claims are processed? FSCS rules say a claim can take a year to assess.
The next question is whether the scheme can share in the insurance surplus?
The scheme is falling at present entirely to life insurers.
During the second half of 2026 the use of surplus will receive wide attention. Before upside is addressed, the key subject for trustees to address is the risk to accrued benefits against which it is working to protect members. How much and how likely? Knowing the answer is a key feature of a risk-reward analysis. Consultants have failed to address the subject for too long.
Ensuring Bulk Purchase Annuities (BPA) are tied into pro UK investment strategies is reasonable given they trade commercially on the “complete security” of UK regulation.
UK based life insurers have had a great run financially (even though they look in UK Stock Market terms underappreciated (Ref Gordon Aitken’s critique “Breaking Down the Insurance Black Box”):
- First there was Solvency II’s matching adjustment pushing up returns and reducing appraised liabilities.
- Along came Solvency UK to ease matching adjustment definitions and add in lower “risk margin” calculations. Now with the Matching Adjustment Investment Accelerator, super sophisticated providers (including the new arrivals from North America) have been given a 2 year head start on regulators in deciding what can qualify for MAIA. Hard work for the regulatory team.
- And all along the way CMI tables were overstating longevity making the influential but obscure insurer and reinsurer led IFoA projections committee’s conclusions appear to be a major syphon of value from schemes to the insurance market for over a decade. IFoA / CMI waive away suggestions of conflicts of interest for committee members.
- The reinsurance boom was a big winner from longevity and the related growth of funded reinsurance. It has meant the capital backing of £40 billion out of around £350 billion in deals since 2018 was lower than PRA now thinks it should have been. The loop hole is to be closed without retrospective action.
- And PRA has kept a tight grip on life insurer pricing, which has the effect of maintaining profit margins in the insurance sector. Hard to follow because of changed accounting rules of IFRS17 and its rather subjective Contractual Service Margin. Still, the Life Insurer Stress Test highlighted when you have all time high capital ratios there is not much stress in the life insurer market – as long as discretionary payments to members do not start to get in the way.
There is a new factor. The market has slowed from a peak at nearly £50 billion a year. How will the providers respond? Boom followed by a slow decline raises difficult management issues – with which many old industrial sector teams became familiar over the years.
Is avoid – at least for now – the answer? The lesson is straightforward. The case for “wait and see” is strong. Surely life insurers will start to provide some value share for sponsors and members. The deals may be attractive. The new owners will settle down and Government regulation will become clearer.
We think there is also specific scope for Government to expect BPA providers to have a pro UK investment strategy for UK gilts and productive assets if they are to continue to enjoy the commercial benefit of selling PRA regulation as providing “peace of mind” and FSCS making BPA risk free, even if there is no Government guarantee.
There is more that can be achieved. So wait to see what happens next.
Meanwhile, model the actual amounts at risk and the upside available. Consider, what does severance do for members?
Our Step Up – At Risk Calculator is designed to help.