What is needed to bring better pensions and economic growth:

• Scrutinise actuarial work

Long recognised as needed, the lack of scrutiny made the excesses of LDI and Pension Risk Transfer possible.  Even the threat of scrutiny will transform standards in practice.

• Incentives to change fiduciary duty assessments

Government arranged PPF and FSCS safety nets to be adjusted to favour higher Pro UK allocation of assets.  Long term value sharing agreements given tax incentives.

• Members be activists

Members press hard for discretionary value sharing between sponsors and past and present employees.  Vote of membership on proposed bulk transfers.

C-Suite Pension Strategies has tirelessly advocated run-on as a “credible alternative” to buyout since 2018.  When schemes are treated like a rubber tree, members can tap into upside over the long term.  The standard, relentless, life insurer journey to buyout palms off members and is sub-optimal.  Cut in members to a package benefitting all stakeholders.  Members: Call for a vote before a bulk transfer.

“Add scrutiny and incentives.  Reanalyse members’ best interests.  The result is more of the assets backing DB pension liabilities can be invested to back the UK economy.  To achieve it, finally scrutinise actuarial work and Government adjust what it already arranges as safety nets.  That will update thinking on fiduciary duty and avoid mandation.  Then cut in members to expect to benefit from the exercise of discretion as part of a value sharing package alongside other stakeholders.”  William McGrath, Founder C-Suite Pension Strategies

William McGrath has a financial and industrial sector background.  He was long time CEO of Aga Rangemaster.  Its pension scheme has reached full funding without large sponsor contributions because of a long term, all stakeholder agreement. 

Alternative Uses for Honda's £0.5 billion Pension Contribution

​The Honda Motor Europe pension scheme is being handed over to L&G, its LDI manager, for around £800m.  
Back in 2019 the Group decided to shut its Swindon plant and gave its £930 million pension scheme over £0.5 billion.  
Fiduciary manager Mercer spent £0.7 billion on LDI over 3 years.  Gilt yields were then around 1%.
In 2022 interest rates rose and £1.5 billion become £0.9 billion by March 2024.

The Aga Rangemaster pension scheme provides a rather helpful counterfactual case study.  
It was in a comparable funding position to the Honda scheme in 2018 and still is – it just did not need £0.5 billion in cash contributions to get there.  It continued steadily on.

Now if you had been given £0.5 billion in Swindon in 2019, what would you have done with it?

• Given it back?
• Left it in the car boot?
• Put it in the Post Office?
• Made Swindon Town a premier league team?
• Refurbished a car plant to make electric vehicles?

All better bets than Mercer’s on LDI.

In 2018 Aga Rangemaster (Aga) and Honda Motor Europe (Honda) had DB pension schemes with asset of £930 million and accounts deficits of around £200 million.

Honda donated £500 million to the scheme in 2019.  Honda’s fiduciary manager Mercer spent the money on LDI at the bottom of the interest rate cycle.  Aga kept to a run on plan.  

By 2024 Honda, after the £0.5 billion cash injection and having paid out £120m less that Aga to pensioners, the scheme should be much better off.

The Aga investment gain from 2018 to 2024 is £167 million; the Honda loss is £357 million.

Now Honda is giving the scheme to the LDI manager L&G in a buy-in for circa £800 million.

The conclusion should be actuarial work and the Pension Risk Transfer market needs scrutiny and disclosures now.

Making Hay

• Agree with one Government Department and its regulators that the Gold Standard is for trustees to give you in cash all the money schemes needed to meet their liabilities to members, calculated on a risk-free basis.
• Agree with another Government Department and its regulators you can invest that money at cash plus 1.5%.
• Minimise any capital back up regulators expect you to put up by offloading longevity risk to third party, often offshore, reinsurers. Funded reinsurance can even provide you with cash for your ‘capital light’ business model.
• Ensure trustees in their risk assessments believe they have to ignore the stop loss PPF safety net they have paid for and that your products are Guaranteed to provide “absolute confidence”- even if your sector scheme has no Government guarantee, no money and no track record.

Your £50 billion a year risk transfer business makes so much money you can help penguins, sponsor test cricket and keep a large entourage of professionals happy.  And you and your shareholders can expect big paydays.  But hurry.  Some major global groups have registered just how attractive your niche position is – welcome to the UK Apollo and Brookfield.

Small Clouds

• Trustees could reassess fiduciary duty and propose to exercise discretion to make extra payments to help past (and present) employees because they realise the scheme has more money than it needs. 
• Government requiring (and incentivising) schemes to consider alternatives to bulk transfers to benefit people and the economy.  FRC’s Technical Actuarial Standard 300 V2 already requires actuaries to do the work.  Sponsors will want to be cut in.
• Scrutiny of actuarial work would be transformational.  ARGA heat.  Actuarial consultants have proposed from the PRT boom.  They also have a great business model.  They set the metrics, calculate the liabilities and point out that life insurer pricing looks attractive against the numbers they provided.  They do not look back to show the impact of their past work.  Who has gained from deal using overstated life expectancy tables since 2011?
• Government and its regulators realising just how much they continue to contribute to the prosperity of life insurers and go for a windfall profits tax. The regulatory arbitrages in the business models are becoming a little too obvious.

Good thing life insurers have such brilliant trade bodies and lobbyists to see off daft ideas of running on and being transparent.  Meanwhile Pension Insurance Corporation’s £5.7 billion deal with Athora provides a neat summary of the triumph of the life insurers.