Is Risk Transfer a Gamble?
Derisk and buyout is the settled journey plan proposal of the consultancy community. Time for a time out? A new approach may be needed given changing regulations, economics and saver attitudes. Better options are available to benefit all stakeholders.
At present demand outruns supply provided by a small group of insurers and reinsurers. High margins continue to be achieved by life insurers. A market rebalancing with trustees having more options and time would be healthy
Renewal of a pension scheme – running it on with added sponsor backed security generating funds for all stakeholders is a practical possibility. It is supported by major fiduciary and asset managers, banks and insurers.
We have developed a proposition FiduciaryPlus in close partnership with leading financial institutions. It can make running on happen.
When Running on with Purpose Beats Buyout
Members and their trustees should ask for added benefit payments
Where is your trustees’ journey plan taking your scheme’s members? The Gold Standard endgame is presumed to be annuitisation .But running on can beat selling out to a life insurer.
Where the sponsor is strong, seeking the expensive buyout prize of the regulatory upgrade from Pension Protection Fund backup (well funded) to that of the Financial Services Compensation Scheme (untested) brings few carats and many sticks. The change is hardly relevant for members if there is already a major group involved firmly tied in by the Pension Schemes Act 2021. How do you then assess best interests of members? Think what is lost in annuitisation apart from cash:
And what’s the rush? With the increased possibility that Solvency II regulators will become less restrictive, buyout funding pricing should improve. And the long years of ever falling discount rates have ended.
So before accepting the “derisk and get rid” route, members should want to know their trustees asked for more. With inflation back, are discretionary increases from surpluses in the schemes a possibility? Why not? Is there an alternative? Yes. There is a practical way forward to have a bespoke, run on solution.
DB pensions need not be an endgame run by the derisking tribe – but can bring a new beginning in all stakeholders’ interests. Not the end; not a game. And it starts where trustees re-examine what is in the best interests of members and think ahead. Run on with purpose.
Corporate Sponsors Can Reactivate Pension Schemes to Benefit Today’s Employees Alongside Yesterday’s
UK Government has set a challenge for pension schemes to have a greater role in funding of infrastructure and in galvanising investment in new technologies. Businesses are seen as having a poor record on pay and skills. Companies meanwhile are making clearer, positive statements about commitment to the Environmental, Social and Governance agenda and being supportive of employees as part of Section 172 statements in accounts. Against this background, Boards may wish to review their pension strategies.
Many long standing UK companies have final salary defined benefit schemes. Standard strategies are about decommissioning – derisk and transfer to life insurers – as it is seen as a complex, no upside area.
Enabling schemes to run on rather than run away can help all stakeholders. That requires there to be insurance available against the sponsoring scheme failing to meet its obligations because of insolvency.
That insurance may be extended to cover the need for higher than expected contributions. Schemes need a stable, long term investment strategy focussing on low risk, largely fixed income assets. Then they can take the time to see whether the demographic trends of the last decade, which have shown little life expectancy increases, continue or if the rapid improvements actuaries presume do come about.
Short term end game strategies do current employees little good – something that could change if schemes were reactivated. Schemes then have new rules and work on new, lower risk defined contributions bases: As soon as it is clear that old liabilities are covered then a forward looking plan can start up using the surpluses generated over time.
For corporates looking to give substance to initiatives taken to improve employee benefits and bolster their image and brand, here is a prime opportunity. The sums involved can be very large. Well worth a new, more positive minded examination.
With products provided by major financial institutions there are specific proposals available to sponsors and trustees alike.