There are occasional debates on social media that make this blog. This is one of them.

I have read Macfarlanes 12 page paper. It’s key takeaways aren’t simple but they’re important

• The scale of the UK pension risk transfer market, together with recent M&A and partnerships between insurers and asset managers, has attracted significant interest from private credit managers seeking to develop assets for matching adjustment (MA) portfolios.

• Gaps in insurers’ existing origination capabilities represent opportunities for private credit managers. However, introducing a new asset or structure into an MA portfolio involves considerable regulatory, rating, and structuring work.

• Different structures involve different trade-offs. A private debt collateralised loan obligation (CLO) brings securitisation regulations into play, with associated capital and reporting implications. A unitranche structure may avoid some of that complexity but may not provide sufficient credit enhancement to achieve the required rating.

• Most structured solutions also contain components that are unsuitable for the MA portfolio – junior notes or the equity. The ability to place that component with another investor is an important part of the structure’s viability.

Since Brexit, the Prudential Regulation Authority (PRA) has been rebuilding Solvency II into a UK-specific regime, Solvency UK. The Treasury has been explicit that one objective is more insurance investment in infrastructure and other illiquid, productive UK assets, which lines up with the Government’s wider pensions and growth agenda.

But insurers have been slow to use the easements in using private credit which takes some (default) risk. This reluctance, despite it offering them the opportunity to offer better prices to trustees to buy-out their liabilities, must be frustrating to the PRA (and to the Treasury). For this means our pension funds are being transferred away from Britain to give the same advantage to the USA economy not ours,

You can reach from the link above. I leave it to John Hamilton to respond for me and for those in a group of people concerned to use our pension money not just to pay pensions but to ensure we live in a good place.

John is the Chair of the Trustees of the  Stagecoach Group pension scheme. They have sidestepped the problem we have with British insurers transferring money abroad. They’ve done this by transferring the liabilities to a stronger sponsor (Aberdeen) and retaining where the money they hold to pay pensions is invested. Of course they are not fully in control, they are regulated by TPR who has a responsibility to protect the PPF.

But both DB pension schemes and the PPF are currently in a strong position to run on. So the argument that MACFARLANES make for insurers is equally important for schemes like Stagecoach Group’s, the matching of liabilities with risk reducing assets (bonds) can themselves do more for Britain than has been the case for schemes preparing for buy-out. I guess that if pension schemes in run-off felt that the aim of their defensive strategies were able to take some risk, we might see pension schemes doing more to get housing , railways, technology and climate sensitive power sources built and run.

The insurers are currently under-investing pension money in UK projects for economic growth. Instead they’re sending funds abroad. It is hardly surprising when you see who owns them.