Truell claims buy-out “reinsurance” is “superfunds through the back-door”.

Posted on June 19, 2023 by henry tapper

I recently reported on the Bank of England and Prudential Regulatory Authority’s concern that Insurers were passing on the management of assets and liabilities via reinsurance using captives in Bermuda and other offshore havens.

This strikes the common reader as a bad idea, we want our pensions paid in a clear and transparent way. The article was read by Edi Truell who commented in my Agewage and Pension PlayPen linked in group,

For those who aren’t members, here is what Edi had to say about the matter.

 

When I started Pension Insurance Corp we set up our own offshore captive, as a conduit for longevity reinsurance and also to invest our own solvency capital into productive assets. The FSA did not like the idea of insurers investing into productive assets such as a portfolio of top venture funds, so put pressure on to have it stopped. Pension Insurance Corp now uses funded reinsurance in considerable scale ( its all in the regulatory filings so I’m not saying anything non public domain).

To a considerable extent this is ‘SuperFunds’ – so harnessing external capital to backstop pensions and investing into more useful assets than gilts – BUT by the back door, in an opaque manner away from the oversight of the regulators, and reeking of hypocrisy

Time to

– immediately remove the ‘gateway’ test that (anti-competitively) favours insurers over superfunds

– have tPR use its powers to allow pensioners of bust companies to actually get the pension they were promised, rather than being locked into a sub-par ‘PPF+ buyout’- promote shared outcomes, to give the members a slice of the upside

– clearly give backstop capital providers the certainty of being allowed to make a return on their capital.

I am encouraged that in a recent submission to the Work and Pensions Committee , TPR appears to be coming round to Edi’s point of view

We support consolidation and alternative options to buy-out where it improves outcomes for savers….

Recent improvements to funding levels have meant that more schemes are now able to consider buy-out and this has led to an increase in demand for quotes. While we know that insurers are innovating to meet this increase, we expect capacity of the buy-out market is likely to be limited. How quickly schemes can put themselves in a position to be ready to come to market and the ability of insurers to flex to meet this demand will determine the scale of any capacity issues. With risk transfer deals in the region of £40-50bn p.a. in the last few years[2], in the context of c£1.4tn in DB assets, there is a significant potential gap.

 

Being funded at the right level is just one factor in terms of moving forwards with a transaction to buy-out. Many schemes will need to focus on other aspects before they are able to do so, such as: ensuring that the scheme data is accurate and up to date (poor data can lead to a significant additional premium on any buy-out price), setting the right investment strategy to manage risks in meeting the aim of buying out, and having a pool of assets that is attractive to the insurer.
Buy-out is not the only option. Schemes can continue to run on and there are many reasons why this may be an appropriate option for both the trustees and sponsors. In recent years, we have seen alternative commercial models being developed. Superfunds have emerged as an alternative for trustees seeking to consolidate but are not yet able to buy-out. TPR has been operating an interim regime[3] for the assessment of these consolidators since June 2020 (in the absence of specific legislation). To date one Superfund, Clara Pensions, has completed the assessment process.
Alternative arrangements for consolidation and other forms of risk management are already available or coming to the market. These range from financial arrangements that may help trustees deal with specific risks, or get them to a particular goal, to governance-type arrangements that aim to help trustees improve the day-to-day management and/or make the management of the scheme more efficient.
This is an area for further growth and innovation and the more viable options schemes have available to them the better. We will be publishing guidance for trustees setting out the issues they should bear in mind when considering these alternative models.

Innovation and growth in consolidation models is particularly relevant for smaller schemes. While elements of the buy-out market and alternative models do cater for the smaller end of the pensions landscape, it is likely that these will be more focused on larger schemes. Larger schemes with access to specialist advice may be in a better position to prepare for buy-out. With c28% of schemes having less than £10m in assets[4] (increasing to c72% with less than £100m), there are a significant number of smaller schemes in the DB landscape that need to be catered for. We believe there is space for further work to support the market and consider how smaller closed schemes can better access buy-out and wider consolidation options, particularly as their funding improves and they near their end game.

It is right to have alternatives to buy-out. I support Edi Truell in his campaign to make that happen and am pleased to see him contributing to the debate in this way.

 

Posted in pensions | Tagged , , , , | Leave a comment

Were LDI pooled funds technically bust – last September?

Posted on June 19, 2023 by henry tapper

When the Bank of England stepped in to the long dated gilts market in September last year, it did so to stop contagion from the collapse of certain pooled LDI funds.

It is now becoming clear that at least two of the pooled funds, had to change the valuation  of the assets they held, to avoid the price of the funds from going negative – effectively meaning their funds were bust.

Jessica Tasman-Jones of FT ignites europe covered this in a “fund director briefing” that was discretely published in a mailing entitled  Directors grapple with pricing questions in wake of LDI crisis

Bank of England says NAV of several LDI funds was at risk of going negative before September 28 intervention

Liability-driven investment fund managers have been criticised over their handling of asset valuation during the fallout from the UK government’s disastrous mini-Budget.

The Bank of England has said that the net asset values of a number of LDI funds had been at risk of going negative before its intervention on September 28.

Experts say fund boards may have moved away from so-called mark-to-market pricing around this date to avoid highlighting that their funds slipped temporarily into negative territory.

No asset managers have admitted doing so.

Without forbearance from the counterparty, a negative NAV would result in a fund going bust, compounding the forced selling of gilts into an already stressed market.

Some counterparty arrangements mean a fund must maintain a minimum NAV and could therefore go into default before hitting negative territory.

Fund boards at both Insight Investment and Legal & General Investment Management adopted fair value adjustments at the time.

While fair value adjustments are accepted practice, they are typically applied to rarely traded securities, not gilts where there is market pricing.

“It was self-serving, making them look better compared to their rivals,” says one portfolio manager. “I have never come across using fair value [adjustments] to price up a portfolio.”

Con Keating, chair of the bond commission at European Federation of Financial Analysts Societies, says the correct course of action for a fund with a negative NAV would have been to value the fund based on market pricing and to ask forbearance for some period.

“If they grant it, there is no immediate need to start the insolvency/liquidation process,” he says.

Simeon Willis, chief investment officer of XPS Investments, a pension consultant, adds that it would not make sense to follow through with a closure of a fund if its NAV went negative and was back in positive territory the following day.

However, he adds: “We were happy with the approach that was taken using price adjustments in response to a very unusual situation.”

A spokesperson from LGIM says fair value pricing is a “recognised mechanism used by asset managers in certain market conditions, such as, where there is a clear market dysfunction”.

“Fair value pricing decisions taken by LGIM are subject to well established governance oversight and approval and are taken in the best interest of clients and their investment outcomes,” the spokesperson says.

A spokesperson from Insight says: “The majority independent fund board considered a range of options before deciding that making a fair value adjustment was in the best interests of shareholders. The decision was taken after the Bank of England announced its intervention in the gilt market, indicating that the market was dysfunctional. This is a well-established valuation mechanism, which is described in the fund prospectus.”

Valuation of assets under stressed scenarios is likely to be one focus within the Central Bank of Ireland’s discussion paper on macroprudential rules for investment funds due next month, says Adrian Whelan, global head of market intelligence at Brown Brothers Harriman. The paper has partly been driven by the LDI crisis.

However, the European Securities and Markets Authority’s publication of its final report on a common supervisory action on fund valuations released in late May generally found good practice, he says.

Wise after the event?

There must have been some very relieved fund directors when the Bank of England intervened. I am surprised that more is not being made , not just at how close some pooled funds were to going bust, but with the risks taken by fund directors with other people’s money. It would seem that at least one consultancy was aware that unit prices were effectively being “made up” by insurers and ran with it.

If there had been no intervention and gilt prices had continued to fall, who would have been responsible for meeting the “fair value prices”, established by the Funds and not the market? When Andrew Bailey said that he had but an hour to save the financial system, what would have happened if he’d delayed? Would those “fair prices” have been exposed as an artifice? Would two managers LDI funds have gone bust?

Did “fair value valuations” happen after the BOE intervention (as Insight are suggesting), if so why couldn’t the manager hang on till the impact of the announcement normalised gilt prices? And why was this not mentioned when Insight gave evidence to the WPC on what happened to pooled LDI funds in September?

This may be a story that the managers of LDI pooled funds don’t want to discuss.  Because there was a happy ending and the crisis was averted by the intervention , we may consider this a “non-story”.

But it seems to me that the LDI fund managers were knowingly taking a risk not just with their policyholder’s money, but with the credibility of the gilts market.

Fair value pricing may have saved the day, but how did that day arise and what would have happened if the BOE had left the market to sort itself out?

Posted in pensions | Tagged , , , | 2 Comments

Little to celebrate in this “aggregate surplus of UK DB schemes.

Posted on June 19, 2023 by henry tapper

Numbers …numbers

There are new numbers from the PPF. DC savers with mortgages should be scratching their heads that those with DB pensions are seeing their pensions become more secure because of high interest rates.

The aggregate surplus of UK defined benefit (DB) schemes increased by £52.3bn during May, research from the Pension Protection Fund (PPF) has shown.

Latest data from the lifeboat fund’s 7800 Index revealed the combined surplus of the 5,131 schemes in the index increased to £430.9bn by the end of May, compared to a £378.6bn surplus at the end of April.

The index reported the funding ratio increased from 136.1% at the end of April to 145.1% at the end of May. The total assets of the schemes were valued at £1,385.2bn while the liabilities were £954.3bn.

The PPF also reported there were 4,645 schemes in surplus and 486 schemes in deficit. The deficit of the schemes in deficit decreased to £2.4bn, compared to a £4.5bn deficit at the end of April.

PPF chief finance officer and chief actuary Lisa McCrory said:

“UK government bond yields rose sharply during May, catalysed by the release of the UK inflation data which saw annual inflation falling, but more slowly than anticipated”.

This has led to predictions that the Bank of England (BofE) will have to make further increases to the policy rate to combat inflation and return it to the 2% target.

“As yields rose, the value of scheme liabilities fell. Scheme liability values used in the 7800 index were also impacted by an update to the section 179 assumptions. This served to further decrease liabilities in May, resulting in an overall fall in liability values on a section 179 basis by 3.8% taking them below £1trn for the first time since April 2011.

“As scheme assets weren’t impacted by this change in assumptions and in aggregate schemes are under-hedged to interest-rates, the estimated value of scheme assets fell more slowly resulting in an improvement in estimated funding ratios of 5.5%.”

The PPF can now celebrate the schemes that did not sell their long term assets in 2022. These are the schemes that such as Associated British Foods, that did not hedge out their interest rate liabilities and took a view that at some point interest rates would rise.

There are a few schemes , that abandoned their hedging in early 2022, realising that interest rates could only rise. These are the schemes that Lisa McCrory is celebrating.

A colossal waste of everybody’s money

On Wednesday we will see sessions of the Work and Pension Committee devoted to the future of Defined Benefits Pension schemes

I expect the discussion to focus on whether the PPF numbers properly reflect the state of Uk pensions and whether the money lost last year to collateral calls for LDI was money well spent.

I hope to hear from Derek Benstead on how his firm advised the pension industry throughout the last decade that pensions weren’t in deficit at all – using the First Actuarial Best Estimate Index.

I expect to hear concern for the tax-payer who has paid once for contributions to meet pensions and again for deficit contributions to meet the imaginary hole in pension finances.

And I hope I will hear something from employers who found the assets purchased with those deficit contributions washed away to meet the bills resulting from borrowing to fund leveraged LDI.

The cost of pensions for corporate DB plans has been enormous, it has stopped companies investing in staff, in technology and research and development. It has meant that DC pension contributions have trended towards AE minima rather than match the true cost of DB pensions.

DB schemes now find themselves in credit, for as spurious reason as they were in deficit. The country has paid a huge price to waste over £500bn in 2022 holding hedges against falling interest rates and rising gilt yields.

I urge the Work and Pensions Committee to ask why we paid that price, when quite evidently there was no need to.

Posted in pensions | Tagged , , | Leave a comment

Richard Smith in Belgium ponders the cost of not doing a dashboard

Posted on June 18, 2023 by henry tapper

Myriam, Steven & Giselda

Richard Smith’s European pension odyssey kicked off in Belgium last week. I’m a little out of sequence in catching up, but I’m sure you won’t mind as the insights from his visits to Copenhagen and Stockholm are published on this blog via the links in this paragraph.

Here’s his report on his trip to Belgium

 

My takeaways

“The cost of doing pensions dashboards is cheap for the great deal of trust in pensions they create; dashboard are just the right thing to do”.

It is clear we will not have pension dashboards using the state infrastructure for at least two years. Anyone who looks more deeply at the roll-out of dashboards knows that “dashboard BAU” will be at least two years after the dashboard availability point meaning that the vision for dashboards that has been presented to the British Public is unlikely to b fully available till 2028.

Meanwhile in Belgium, Denmark and Sweden, dashboards are up and running.

What harm is being done in Britain by not having a dashboard?

Next week  – Oslo and the Hague

As I write, Richard is navigating the northernmost parts of the European landmass before returning to South to Oslo and the Hague.

Next week we can look forward to further insights from the Norwegians and the Dutch.

Posted in pensions | Leave a comment

Value from the choices we make – Mark Ormston

Posted on June 18, 2023 by henry tapper

Mark Ormston

Mark is a touchstone for this blog, not just because he is young enough to represent “next gen” pension thinking , but because he thinks things from first principals, what matters to people’s pensions matters to him.

So it was no surprise that he picked up on what clearly matters most to most people and wanted to discuss the news that the window for topping up state pension credits has been pushed back to July 2025 meaning that millions of people with incomplete national insurance records, can top up their pension credits to get all or most of their full state pension entitlement.

Speaking on Nico and Darren’s VFM podcast, he pointed out that the state pension doesn’t get the bandwidth it deserves in discussions about pension engagement – because it competes with the private sector for attention and for people’s money.

 

Investing in state or private pensions?

Judging by the relative demand for DWP’s pension wise (which is underused in advising on private pensions) and the DWP’s pension service (which is struggling to meet demand for help on state pensions and benefits) we might conclude that for most people, there is more value in the state than private pensions.

Buying “added years” of state pension is a straightforward transaction, you get quoted a cost depending on how much of the year you have already got credit for and pay for the rest.

This year’s top-up for a missed qualifying year currently costs £824.20. It’s cheaper if you’re topping up the two most recent tax years, which would cost you: £800.80 for the previous tax year (2021-22) Or £795.60 for the 2020-21 tax year.

Is this value for money? You are buying insurance against living too long at a fixed price, you will get a string of payments that last as long as you do  which protect you against inflation via the triple lock.

It is a choice available to anyone who doesn’t have a full history and you can find out whether you have that choice by checking your state pension forecast here

It was good to hear the “competition” between state and private” pension benefits being part of a VFM podcast.

CDC v annuities v drawdown

Another topic of discussion was whether CDC – where offered as a pension, should be positioned as the default option for people “retiring” from a workplace pension scheme.

Claire Altmann and Simon Eagle had said they should be at a session of a recent PLSA event Mark was keen to engage Nico and Darren on how CDC pensions were positioned relative to annuities in the choice architecture.

If you are running CDC as your workplace pension, as Royal Mail will, the choice is “take it or leave it”, but when you have a CDC offered to you at retirement – should it be another investment pathway – competing with annuities, drawdown and cash, or should it be something you get unless you opt out of it.

Again this is about relative value for money and competition between a collective solution and a personal one. Mark was very good at emphasising the commitment people make when purchasing an annuity, for most people it is an irreversible decision. Mark asked whether CDCs should be irreversible like annuities or flexible like drawdown and cash.

There are some interesting trade offs here. If the cost of flexibility is a lower pension , would people consider having property rights a price worth paying.

Are pension freedoms offering greater value for money?

As the discussion on choices continued, it broadened into a more philosophic debate about choice and its value.

Many people who choose an annuity , still do not maximise the value of their choice by comparing the market (as they can do with Mark’s firm- Retirement line). Many people fail to maximise the value of their purchase by getting their life expectancy assessed by a professional underwriter (it’s a one way bet in your favour).

And the question of inflation protection is often ignored in favor of getting the highest possible initial pension. This problem is less acute since the pension freedoms, as only about one in ten of those retiring explore annuities as an option.

But what about the other 90% who ignore the annuity option? Are they benefiting from pension freedoms by disregarding annuities?

Are people getting better value from drawdown?  Recent market conditions have meant people looking again at annuities as a safe haven product but are these choices exclusive to the financially sophisticated, are the silent majority of savers getting left behind without a clear default as to what to do?

These are questions that I have discussed with Mark and they deserve more discussion. In Australia, the Retirement Income Review is requiring clearer direction from the fiduciaries of Superannuation Schemes on retirement income options. These fiduciaries are encountering the same difficult questions as were being discussed on this podcast

The value we get from the choices we take

You can see why the DWP chose to avoid “decumulation” in V1 of its VFM Framework.

The value of choice will only be assessable over time , we are less than ten years into the pension freedoms, we cannot tell how removing compulsory annuitisation will have impacted private pensions till we can compare with the benefit of hindsight, the annuity value of private pensions relative to the money drawn and retained through investment pathways and through whatever decumulation defaults emerge.

We are expecting another consultation on the conversion of pots to retirement income this summer. Inevitably it will reuse the language of VFM (outcomes based analysis).

But while discussion will focus on the relative value of collectives , annuities and flexible drawdown, there should also be a discussion on the value of choice.

Thanks to Mark Ormston for getting that discussion underway. I would thoroughly recommend you listen to him on this podcast.

Posted in pensions | Leave a comment

What is “conditional indexation” and why is it important?

Posted on June 17, 2023 by henry tapper

USS is being asked to consider Conditional Indexation (CI). The idea is important but misunderstood

So they’ve produced a guide

The idea is to share the risk and rewards of investment so that members get more of the upside and employers get less of the downside of the investment return and changes in liabilities.

What happens is that members agree to not have an automatic right to increases in their pensions but agree on a formula that cuts them into any upside – by right.

The employer (UUK) likes the idea of stabilising funding rates with DB taking a step closer to a defined contribution structure. Members accept that over time, this will lead to more risk rewarded as the trustees agree to more risk with which to reward members.

The DWP has been approached to discuss whether what is on offer is a form of CDC and it would seem that risk sharing of this kind can be carried out by an occupational scheme without need for a change of legislation.

Not retrospective

Importantly, the change is not retrospective. So any benefits accrued before CI’s implementation would be guaranteed, including indexation of an existing promise,

Progress so far

The two main protagonists in recent pension disputes have expressed a willingness to find a way forward through CI

In light of the significant improvement in the funding position of the scheme, in March 2023 a joint statement confirmed that UUK and the University and College Union (UCU) agreed to develop and implement a robust and transparent mechanism for managing risk, which can provide more sustainable benefits and contributions for future valuations.

A joint working group has been established through the USS Joint Negotiating Committee to consider stability and although CI is not expected to form part of the outcome for an accelerated 2023 valuation, as it would take time to establish these arrangements if the stakeholders decided to proceed, CI could play an important role in the future sustainability of the scheme beyond 2023

 

A model for others?

Some experts point to the past and see CI as a return to the “best endeavours” approach used by occupational pensions before a more formal guaranteed approach was adopted.

Some will see such a return as a backward and regressive step, others will welcome it.

What we can hope for, is that CI will become an option for DB schemes looking to provide future accrual for members and intending to pay pensions – rather than outsource these payments to an insurer.

The regulatory snag

There is however a snag with regards using conditional indexation schemes as workplace pensions under auto-enrolment rules. These rules demand that indexation is guaranteed, a technicality as in all other respects, members are being guaranteed pensions well in excess of anything that could have been bought under the traditional DC formulation

 

Posted in pensions | 1 Comment

Boss bests Brummies – Springsteen at Villa Park

Posted on June 17, 2023 by henry tapper

 

From Astbury Park to Villa Park’s been a 50 year journey for veteran rocker, Bruce Springsteen, but as a lively pensioner remarked to me after the gig “you wouldn’t think he’s 73”. Like Jagger, Springsteen is not slowing down.

There are few to match him,;- to me – only Nick Cave.  Cave is exploring a different relationship with his audience. Springsteen’s here for fun and for memories, Cave explores grief. To me , they are the two top rock and roll singers playing today

In a three and a half hour set, the Boss reprised material from 1973’s The E Street Shuffle to the soulful Nightshift recently released and  the set’s only cover.

Highlights included a big band version of Kitty’s Back , a searing Because the Night and a triumphal “Mary’s Place –  in which his question “how can you be broken hearted?” was answered by a packed house. Of course you couldn’t be anything but 100% with the boss.

A few of the old standards, sounded a little jaded, Born in the USA has not worn well and Back Streets was a little too much an elegy for early days. But for the most part, the show stayed the right side of mawkishness. buoyed by the band, now numbering twenty or so – including a large horn section.

The River was played straight, it dominated the first half of the show in tone and style and was delivered word perfectly by most of the 50,000 in the stadium.

The heart of the show is the twinning of “Wrecking Ball” and “the Rising” which along with “She’s the One” cranked up the energy for the greats that follow. Badlands, Born to Run and Thunder Road were as awesome as I’ve seen them played.

Springsteen ended the show with a solo number , (as did Gretchen Peters at her farewell gig earlier in May).  There is a special feeling for American vets who have been supported over careers by British fans and the “human touch” came out in “I’ll see you in my Dreams”.

The outstanding feature of the evening was the sustained energy. Getting (mostly) pensioners to stand for 3+ hours and keep them hooked takes “sustainability”, Bruce should be added to your portfolio now – as he roars as he leaves – this show is Viagratic!

The advantages of a balmy night and a beautiful day may have seen a few lucky punters taking in a double helping of Bazball and Brooce. If they did, then they can put their feet up – it isn’t going to get much better for them than Friday 16th September.

Villa Park is great once you get inside but was showing teething trouble hosting this event in the evening. We were late in and even later out and many  had to walk back the 3 miles to the City Centre, rather than stand for more hours for busses, the catering simply wasn’t up to the quality of the show.

But who cares, this was one of those Springsteen nights we’ve come to expect but half expect never to see again.

We made the trip up from London, not least to get some Brummy joy. I’m seeing the boss again early next month and it will be interesting to see if he can raise the same participation in Hyde Park,

Though we got back to London closer to morning than midnight, I doubt we will see a better set. If you can get a Springsteen ticket, buy now – the boss is still at his peak.

Posted in pensions | Leave a comment

Richard Smith in stunning Stockholm – dashboards and the colour purple

Posted on June 16, 2023 by henry tapper

Apologies to Richard and my readers, the first in this series – on Richard’s visit to Belgium – will get its own blog shortly!

Posted in pensions | Tagged , , | Leave a comment

More master trusts to merge in next few months

Posted on June 16, 2023 by henry tapper

After a quiet few months, I foresee the rate of consolidation of DC master trusts picking up over the next few months with announcements beginning next week.

This blog asks what is driving consolidation and what it means for a pension system rocking from its failure to consolidate data onto a pension dashboard.

What is driving consolidation?

I had breakfast yesterday morning with the Chair of a small master trust who has been involved in workplace pensions to and through the introduction of auto-enrolment. He reminded me that chairing a master trust is a full time job and that many of the decisions he has to take are as tough as those for scheme 50 times his scheme’s size.

His problem is a microcosm of a wider problem, his trust is too small to compete for consolidation and can only grow by keeping existing clients happy. “Clients” in this case means participating employers – who are increasingly looking to the secondary market to get members better deals (typically on price). In short, the small master trust, as a commercial entity is toast, its better off selling itself now – rather than in three or five years where its clients have left.

Medium sized schemes with powerful private equity backing are looking to compete with the bigger schemes, especially the larger consolidators, and need the assets to cut the deals to make them credible at the top of the market. Now is a good time to offload your smaller scheme – there are buyers.

Finally, the direction of regulation is towards delivery through scale of value. Value comes from a high quality of service along the way (important to employers in the short term) and from high quality investments over the long term (what drives better outcomes). The access to capital that is available from well funded master trusts allows regulators to feel comfortable when consolidation is put to them.

So ready sellers, ready buyers and a benign regulatory climate mean that any master trust with less than £1bn of assets and some with more, are actively considering selling up.

Is consolidation in the consumer’s interests?

The Pensions Regulator has to consider these interests in the short and medium term, no one can look much further than the end of the decade, it is likely that consolidation will continue beyond then, if we are to move towards an Australian system of Dc superfunds.

Australia is touted as an example of consolidation working for the consumer, the pensions dashboard is an example of a lack of consolidation meaning that savers can’t see their pots and pensions in one place.

A consolidated pension market makes sense for the consumer in the longer term though in the short term, many will lose options that they cherished .

And for employers – who carry the responsibility of administering workplace pension contributions compliantly, a simpler system where there are fewer and easier choices, makes sense. The small pots problem becomes manageable when the feeds needed to operate systems such as “pot follows member” are reduced in number to the fingers of one hand.

Ultimately, members will benefit from a simplification of the system, as a result of employers finding ways to understand their pension choices. The VFM Framework operates properly where there are tens rather than thousands of schemes under assessment.

What’s stopping us consolidating?

The complex system of checks and balances that ensures schemes consolidate without “member detriment” can be a curse rather than a blessing.

The technical wrinkles that differentiate schemes are often of more consequence to lawyers than members. Think minimum normal retirement dates.

But more importantly, the proliferation of charging structures, platforms, funds as well as “scheme rules” mean that it is never as easy for schemes to transfer ownership as it seems.

And then there are the vested interests that get lost;-  jobs – not just in operations but in governance;- lucrative advisory deals and of course the consolidation of professional service contracts for lawyers and auditors. Everyone has notice periods , no-one is happy to lose work.

And many small schemes can legitimately argue that they have pioneered innovation. Mastertrusts such as Malcolm Delahey’s SuperTrust for instance. Many small schemes which are now part of Cushon and Smart had features about them that they could be proud of and which may not survive as the consolidators combine investment and service propositions.

Many of the smaller master trusts which we will lose in the months and years to come have built up special relationships with their participating employers which will be lost – or at least changed.

With so many stakeholders tied up with each master trust, there are many more things to consider, many more interests to serve.

Towards a better market

We sometimes forget that we have a highly sophisticated professional services market in the UK – one that is the envy of the world. We may feel that we are making heavy work of consolidation – but we are making a good job of it. Members interests are being looked after, the master trust assurance framework is working and consolidation is happening in an orderly way.

At a time when there is a lot to be worried about, the state of our workplace pension market is improving at a pace. For that we should be thankful.

Posted in pensions | Leave a comment

Do you want your pension funded from Bermuda?

Posted on June 16, 2023 by henry tapper

Bermuda, great for holidays – but would you want your pension funded from here?

 

The Bank of England’s Prudential Regulatory Authority has written to the Chief Risk Officers of the UK Life Insurers it governs with a warning to look to the way they are funding the buy-out of our funded DB pensions using financial engineering known as reinsurance. Most of the reinsurance market is based in Bermuda.

Put in easier language, what they are worried about is that instead of our pensions being backed by Government bonds and other low-risk financial investments, they are increasingly being backed by promises made from overseas insurers, often based in Bermuda who are outsourcing the risk allowing the UK insurers to make more sales.

Aviva and Just have both used this type of reinsurance lately, the Bank of England is clearly worried as we should be.

You can read the letter here, it is 9 pages long but the key concerns of the PRA are listed on page 3.

Put in easier language;

  1. These reinsurers are untried and untested and could go bust – leaving pensions unpaid
  2. The reinsurers are mixed up in banking rather than life insurance – if there’s a new banking crisis, pensions may go unpaid
  3. The strength of the reinsurer to pay pensions and the strength of the investments made by the insurer are linked – if one goes down , both go down – so pensions may go unpaid
  4. If something goes wrong, there may be nowhere else for UK insurers to go, meaning pensions go unpaid.

Immediate impact

Both the Times and the Financial Times have picked up on the letter. Both see the risk as “systemic”, meaning it could create problems for the wider economy.

Funded reinsurance could create vulnerability and hit UK investment, Bank warns – The Times

“…but it would come at a cost of creating a systemic vulnerability in the form of a concentrated exposure to correlated, credit-focussed reinsurers, and an opportunity cost in the form of UK productive investment foregone”.

Regulator says insurers’ increasing use of ‘funded reinsurance’ risks creating ‘systemic vulnerability’ – Financial Times

relying on reinsurers to help meet a surge in demand for corporate pension deals risked creating a “systemic vulnerability” for the sector and restraining domestic investment.

What this means for insurers

Ever since interest rates and gilt yields rose, employers with defined benefit pension schemes have seen the exit door as “buy-out” with an insurer. Key to this was the security of the member’s pension which would now be subject to insurance rather than investment with the Bank of England standing behind the insurance companies.

This letter spikes that journey. While some insurers have considerable capacity to do their own deals, expansion in the market for secondary players looks like being constrained. The race to buy-out may – for some – have had a false start.

And undoubtedly, this letter – once it has been translated into language that readers of less rarefied publications can understand, will lead to pension scheme members and their representatives, wanting to better understand just who is responsible for paying their and their partner’s pension for up to 50 years.

What this means for pensioners (present and future)

Some would call this a timely intervention on behalf of savers, some might ask why these deals have already taken place and why the warning is coming now and not earlier.

The PRA’s call to action is hardly fearsome

most firms have been keeping their PRA supervisors informed of FundedRe transactions they are entering into and their risk management approach to them.

However, given the volume of the transactions accumulating and the PRA’s interest in understanding the risks arising from such concentration, we would like all firms to notify
their supervisor promptly of individual material9 FundedRe transactions entered into from the date of this letter

For pensioners who are now being paid with money that originated from these reinsurnance deals, there should be some concern, the letter concludes

we see significant potential risks to the PRA’s objectives from the systematic use of FundedRe to meet the increase demand for bulk transfer of defined benefit pension liabilities. The effect
might be to accelerate these transfers in the short run, but it would come at a cost of creating a systemic vulnerability in the form of a concentrated exposure to correlated, credit-focussed reinsurers, and an opportunity cost in the form of UK productive investment foregone.

What this means to the future of pension schemes

For some time, this blog has been calling on trustees and employers to consider alternatives to the buy-out of benefits with insurers. I believe that DB pensions could and should be investing in productive capital and the opportunity cost of sending money to insurers who lose control of it through reinsurance is that our savings are no longer visible. We cannot tell if our money matters – have little oversight of ESG applied and no confidence that the pensions we as taxpayers subsidised, will be doing any public good.

There are alternatives, as the Pensions Regulator made clear in a recent submission to the Work and Pensions Committee. TPR talk of reviving Superfunds, which can invest productively and don’t outsource assets and risk to Bermuda. It also talks of using the PPF as a consolidator. And,  of course,  many pension schemes will continue to pay their own pensions without recourse to consolidation. There are 10.9m of us currently being paid a pension from our employers.

It is very important that these issues are being addressed now and not after the horse has bolted. Well done the PRA for publishing this letter now, let’s hope that the impact of this letter is that our pensions remain invested in and paid by, British organisations, regulated within the perimeter of the PRA, FCA and TPR.

Posted in pensions | 4 Comments