DB pension peace of mind comes from inflation protection, not a sale to a life insurer

The pensions industry has a largely settled opinion that “derisk and get rid” is the right journey plan for pension schemes.  Members are told that here is “peace of mind”.  This approach benefits actuarial consultants and life insurers.  

Scheme members and scheme sponsors should look harder at the alternative option of scheme revival on a modernised basis so it can operate in all stakeholders’ interests.

Members should be asking more challenging questions of their trustees.  Inflationary times may lead them to have a new view of their best interests and the security of their pension seen in real value terms where there is a cap on payments.  The upside of annuitisation is modest, given the fully tested safety net of the well-run, well-funded PPF which covers nearly all of a pension.  

With a buyout access to discretionary benefit improvements goes.  The link to their former employer ends and the investment policies pursued are out of members’ control just as ESG considerations come to the fore.  Solvency II is to be scrapped.  The replacement is unknown.  That creates uncertainty around concentration and systemic risk for the insurance industry’s own safety net.  There are also profound questions over pricing as Government initiatives to relax regulation take hold.

Most sponsors meanwhile have committed to high standards of ESG.  Pensions is a test case of those policies when in action – given the large investment portfolio and whether they see the scheme’s role in looking after the interests of former and current employees as important to them.  They should be encouraged to stay the course.

C-Suite Pension Strategies shows how available products can be combined to produce better outcomes.  But what is really needed is for members and sponsors to question the negative pension sector mindset.

Transparency on the low value of the safety net improvement and the embedded losses being suffered over the sector’s misreading of mortality trends is needed.  Certainly, the case for “derisking” from the members’ perspective should be restated more cogently.

Current markets provide a good example of the way the market works.  Interest rate rises should have reduced actuarial liabilities – more scope for improvements?  But not so fast.  Matching asset will have fallen heavily in value.  The scheme may be forced to sell return seeking assets to meet cash collateral calls under LDI programmes.  Ironic if risk reducing measures stand in the way of even one-off added payments to members.

“Decommissioning” is very often, in the C-Suite view, not in the best interests of members and does not provide “peace of mind”.  When the Boards of sponsors embrace the schemes and do not abdicate responsibilities, a new and better settlement can emerge because there is time available for all stakeholders to reach the best available outcome.

No discretionary increases?  Members should consider their position and revolt.

“We Need To Talk About Solvency II” says Prudence

“We’re scrapping EU Rules” says Chancellor

Government statements underline it is 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.

Now Kwasi Kwartang is “scrapping EU rules from Solvency II to free up billions of pounds for investment”.  So, Prudence is right once again.

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.