Introduction
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Pension Risk Transfers (PRT) are a £50 billion a year business segment, with assets being handed over to life insurers by DB pension schemes in exchange for taking on risks as assessed.  Credible “run-on” Alternatives to PRT have to be considered by trustees ahead of PRT’s under Technical Actuarial Standard 300 Version 2 in place from April 2024.  DWP’s new Funding and Investment Strategy (FIS) requirements were introduced in September 2024 requiring a reset.  In addition, Government is making access to surpluses by members and sponsors more straightforward.

Disclosures

Current disclosures and the approach adopted by professionals can result in relevant standards being exploited or sidelined.

A raised level of disclosures is needed to ensure that all stakeholders can see deals are fair and reasonable.
This note proposes that disclosure levels should match those required by other corporate activities under the Listing Rules.  

Disclosures proposed are:

• Material contract terms: Parties and key clauses covering residual obligations, restrictive covenants arising with an on-sale and with reinsurance.
• Profit / loss price paid to life insurer and comparison with actuarial and accounting valuations.
• Scheme track record:  Assets, liabilities and cash contributions over not less than 5 years.
• OCI: Items taken through Other Comprehensive Income over last 5 years.
• “Background to and reasons for the transaction” section.

Member and sponsor access to share of surpluses on an ongoing basis and on the wind up of the scheme can be part of a wider assessment.

The following is a recent case study on NatWest’s buy-ins.  All parties to risk transfer deals and related consultants may suggest that they are not under a specific requirement to be more transparent.  That is why an urgent review is needed of what information needs to be disclosed involving FRC (ARGA); FCA (Listing Authority); IFoA and IASB.  “Disclosure” is a sensible follow up subject to its excellent reports on defined benefit pension schemes by the Work and Pensions Select Committee.  HM Treasury and DWP can reasonably reflect on whether the massive risk transfer industry is really operating in the way they want.

NatWest Example:  Buy-in Transactions 2023 / 2024:  Case Study

The need for clarification of disclosure is seen from the recent NatWest sale of around a third of its pension liabilities to – it is understood - Rothesay.  

Of note is:

• The deal was agreed in September 2024:  No disclosure.
• The deal was referenced in NatWest’s third quarter figures in its Interim Management Statement (IMS) announced on Friday 25th October:

What has now emerged as an £11bn risk transfer deal, agreed in September, is referenced in a short note on page 30 of the Group’s 3rd Quarter Results announced on Friday 25th October.

Page 30:  Pension Risk:
In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third party insurer for some of the liabilities of the Main section. Around a third of the Main section is now covered by insurance policies that give protection against demographic and investment risks, improving security of the member benefits. The transaction does not affect the 2024 statement of comprehensive income because the net pension asset is limited to zero due to the impact of the asset ceiling.
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This is correct because there is a £7.4bn buffer created by the accounting standard IFRIC14 which means surplus is not being booked because “the trustees may have control of the surplus”.  This is set out in the 2023 accounts.  The question for trustees and the Board should be to explain what the plan is.

This is correct because there is a £7.4bn buffer created by the accounting standard IFRIC14 which means surplus is not being booked because “the trustees may have control of the surplus”.  This is set out in the 2023 accounts.  The question for trustees and the Board should be to explain what the plan is.​

The wording of the IMS is vague and provides no meaningful context.  That a third of the scheme’s liabilities, nearly £10bn, is not referenced.  What the cost of the deal is to be covered out of a surplus of £7bn – which in any case will be lost below the line taken to Other Comprehensive Income – is not explained. 

No reference is made to the exercise which must have been carried out by the actuaries to comply with Technical Actuarial Standard 300 V2.  Why the transaction is better for members or why the parties have not found a more positive use for the major accounting surplus receives no comment.

Trustees – given their control over a surplus – are well placed to seek improved terms for members.  NatWest could be looking to a surplus to help fund / improve current pension provision.

The deal has a precedent and with comparably limited disclosure.  In 2023 NatWest had undertaken a buy-in of one section of the scheme – which may have already had buy-in features.  The cost of the deal against book values is not explained in the accounts.  The OCI is used as a way to mix up numbers to provide a hash total and ensure the cost of the deal is not revealed.

Media Coverage of Buy-in
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The Group provided some clarification when on Tuesday 5th November Sky News reported that a transaction had taken place.  Rothesay declined to comment and NatWest did not confirm the counter party was Rothesay.  That is 10 days after the transaction was referenced in the third quarter figures.

NatWest Group, the high street banking group, has struck what is thought to be the UK's biggest-ever deal to outsource pension payments to a specialist insurance company.

Sky News has learnt that pension trustees at NatWest, which is on track to become wholly owned by private sector investors after more than 15 years in partial taxpayer ownership, have offloaded a roughly £11bn chunk of its corporate pension scheme to Rothesay, the England cricket team's Test match sponsor.

The deal is a landmark in the accelerating trend for companies to insure their pension risks, with NatWest ranking among the UK's biggest pension scheme sponsors.

Its group retirement scheme has about £33.6bn in assets, while it had roughly 190,000 members at the end of September.

The latest deal was disclosed - without reference to Rothesay - in NatWest's third-quarter results statement published last month, but has not been publicly reported.

"In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third-party insurer for some of the liabilities of the Main Section," the statement said.

Several people familiar with the transactions said the counterparty was Rothesay, which declined to comment on Tuesday.

In a statement issued to Sky News, a spokesperson for the NatWest Group pension fund confirmed the deal, saying: "As part of its long-term strategy, the Trustee of the NatWest Group Pension Fund has recently insured around one-third of the Main Section with buy-in policies.

"The buy-in policies are Fund investments that further improve the security of member benefits by increasing protection against demographic and investment risks.
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"As with other investment decisions there is no change to member benefits and members will continue to receive their benefits directly from the Fund."
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The trade press dutifully then referenced the transaction.

​The Precedent in the 2023 Annual Report and Accounts

The cost of fixing out permanently certain scheme liabilities through a buy-in in 2023 is referenced in Note 5 on page 322 of the 2023 Annual Report and Accounts.  The actual number is not provided.  It is netted against other items reflecting market movements and changes in measurement shown below the line as part of Other Comprehensive Income.  This is reported on page 299 (extract follows).

Investment Strategy (page 322, note 5 Pensions)
During 2023, the Trustee completed a buy-in transaction for the AA section of the Group Pension Fund, passing all material longevity and investment risk for the section to an insurer. At 31 December 2023, the assets of this section comprised mainly of the buy-in asset (a bulk annuity policy valued at £546 million under IAS 19, covering 99% of the defined benefit obligation attributable to this section), together with residual assets of c. £145 million. In exchange for an upfront premium paid to the insurer, the buy-in asset provides a stream of cashflows to the Trustee replicating payments due to members. 
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The premium was determined by the insurer using its pricing basis. Under IAS 19, the value placed on this asset mirrors the valuation of the defined benefit obligations covered, incorporating an assessment of credit risk. Since the insurer’s pricing basis is more conservative than the best-estimate valuation under IAS 19, an asset loss arises at the outset, which is recognised through OCI along with the impact of other movements in asset values over the year. In future, the buy-in asset value will move in line with movements in the defined benefit obligations covered, meaning that the scheme is protected against longevity and market risk

Consolidated Statement of Comprehensive Income (Page 299) 

Conclusions
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The conclusions from recent deals like that of NatWest and other examples like Michelin Tyres is that disclosures are insufficient.  That allows actuarial and accounting standards to be exploited or sidelined.  Evidence of compliance with TAS300V2 is yet to emerge.  OCI is a dumping ground for awkward numbers.  ARGA when it is turned on needs to radiate authority to the risk transfer industry.

Asking trustees and sponsors one question on whether actuaries are complying with Government regulations can change the amount of your pension and the quality of your future pension provision.

“Have the actuaries provided their Technical Actuarial Standard 300 Version 2 Report yet?”

Ask it because:

• The risk-benefit analysis required by TAS300V2 to compare run-on and risk transfer transactions highlights that most schemes go to “derisk and get rid” strategies are not in members’ or sponsors’ financial interests.
• The reality is that the risk of a reduced pension is minimal, falling and manageable.  The price paid to get rid is that the upside is sold to a third party (which makes large immediate profits) for nothing.  Exercising discretion is what sponsors and trustees should want to do next in all stakeholders’ interests.
• At present, money siphoned out of the UK corporates into schemes is in turn being siphoned on to life insurers.  

Members and sponsors need to know these numbers are being considered.  Transparency changes minds.  Numbers talk: 

Once the numbers are established the governance takes over.  Trustees who do not ask fundamental questions – like assessing whether to hand the assets and liabilities of a Trust over to a third party – risk being in a breach of trust, justiciable by the beneficiaries.  Taking bad advice is probably OK.  Ignoring key subjects is not. 

Trustees and sponsors will be keen to align with new Government policy.  They should then want to ensure members are informed about their new Funding and investment Strategy and how it impacts their Statements of Investment and Funding Principles.

Do not let the sector drift on further with its self-serving Endgames.  Sponsors need to get stuck in to ensure their money and commitment is being used to best effect.  And to have a better pension, what members need to do is ask for one.

Sponsors and trustees should take care to avoid their trusted advisors natural wish to a cover up the track record over recent years.  What schemes need is an informed “heads up” on where they are.  Ask CARO (C-Suite’s Credible Alternatives Reference Organisation) to provide one.  Contact us to find out more.

Trigger sustained high inflows after the Derisking Overshoot by UK DB pension schemes.
 
Cash inflows to bring a UK Capital Market revival can come from existing UK DB schemes becoming investment long-termists.  The bounce back from the derisking overshoot means far more money is available for productive asset purchases than is assumed.  Reversing the long years of cash outflows, weak ratings and sector decline is there for the asking.  Get stuck in.  The case is straightforward.  Risk for members is low and scope for improvement for members and sponsors is very high.  

Leaving the pension advisory sector to its own devices has been a disaster for members and sponsors.  Expect the reassessment to be on the way.
 
Why now?

• Chancellors Hunt and Reeves have changed the political direction post the LDI debacle. FRC and DWP regulations require DB scheme strategy resets. Be keen to hear the outcome.
• De-risk and get rid ASAP” endgame plans are designed to address remote problems at unnecessary costs and by giving up available upside for nothing. Unacceptable.
• Surpluses in schemes can be used to improve pensions and cut / eliminate pension costs for today’s employees. Why not?
• Ask sponsors, trustees and their advisors about their risk-benefit analysis.  Say you will be looking for their publication of an updated Statement of investment Principles.

Your engagement will result in the sector scrambling to self-correct.  No need for you to have a direct investment in the sponsor– it’s about those with the money to invest and who should look to asset manages for new approaches.  Major international groups are prime targets.
 
You and DB schemes:  Show awareness and interest.  Expect Boardrooms to have a DB pension funding refresh in the next year.  Rarely can you achieve so much by doing so little.  An expectation that more money will come into markets will re-energise The City.  Read the attached “DB pension schemes – a productive asset investor perspective”.
 
And to reflect on the economic damage caused by what Lord King and John Kay call the biggest unforced policy error of the century, read the case study, based on its accounts, of Michelin Tyre.  “No Grip. No Stars”. 


Better pensions are also there for the asking.  There's a theme developing here....