Prudent to wait for new pricing and security framework ahead of risk transfers
We need to talk about Solvency II.
A “once in a generation opportunity” says the CEO of the Prudential Regulatory Authority. “A once in a lifetime opportunity” says the Association of British Insurers. The Financial Times writes editorials repeatedly about it. Yet actuarial consultants carry on regardless with derisking deals and ignore it.
It can affect the pricing and security of buyins and buyouts which pension trustees are told endlessly provides their “Gold Standard”. Surely with the shakeup in the insurance industry just ahead (and with 2023 longevity tables set to cut liabilities) it is in the best interests of members to take a “time out” in the endgame. No need for speculation. Wait and see. Be prudent.
And anyway, how many carats does the Gold Standard have? The PRA highlights that risks of insurance company failure to members’ pensions should not be “underestimated” and that industry practices circumventing Solvency rules should not be “baked in”. It hopes that a substantial release of capital can be achieved while protecting policy holders “adequately”.
Right now why ditch your sponsor / strong PPF back up package for a modest life insurer cover upgrade? The life insurer promises that “should we crash our competitors will sort it. Don’t worry.” It’s prudent to consider how the detail of Solvency II reform impacts the Financial Services Compensation Scheme before moving ahead.
Take the time to consider whether buyout is appropriate. Pricing can be better than an actuarial model expects and still not be value for money. Change the premise from “get rid ASAP” to “run on with purpose” and much better options appear. DB Pension Policy Reset to Secure and Build (www.c-suiteps.com)
FD Carol Animations summarises the case for a mindset change
We would love your thoughts on these 5 statements: https://www.surveymonkey.co.uk/r/YNZ7YQB
Time Out for Buy Ins and Outs?
Chancellor of the Exchequer Rishi Sunak met the UK leading life insurers on 27th June. He discussed the Government’s objectives for Solvency II reform and its current consultation. That closes on 21st July. Reform is a key part of “unlocking tens of billions of pounds of investment into the economy”.
How the objectives are to be achieved is the subject of fierce debate with insurers. Solvency II reform has become a major theme in the FT.
For DB pension schemes the long term impact of Solvency II reform should be positive. But right now why not just wait and see. Action looks like a gamble with members’ and sponsors’ money. Yet Solvency II is a mysteriously under addressed subject by actuarial consultants. Pricing and what enhanced security protection is offered will be affected.
Some suggest Solvency II is already priced in or that it will have little effect. That is speculation. Don’t forget major new entrants are expected in a market which currently has a only short list of sizeable players.
Buyins and buyouts may be affordable. But right now are they desirable? With inflation around 10% perhaps it is time to give attention to (one off) discretionary benefit improvements as a priority.
And there is another major reason to wait for updates. It will only be in mid-2023 that longevity tables will have the 2021 Census and Covid factored in. Why not prepare, but do nothing? Time for some masterly inactivity from trustees whatever the industry pressures.
And meanwhile, why not complete our survey and look at our animated take on pension derisking.
5 reasons buyouts may go on hold in 2022. Will pension scheme renewal take over?
FD Carol Animations