Sense and Scalability: Pension Scheme Myths and Opportunities

Rhetoric and Reality
Keeping ESG Statements and Pension Policies Aligned
Sponsors can make their pension schemes a worked example of their ESG strategies

Boardroom Statements

Board statements on ESG policies have become clear and committed.  And often ambitious.

• “We’re committed to building a better planet.”
• “Our purpose and new 2030 ESG plan will generate long term value for our stakeholders and triple bottom line benefits for people, planet and profit.”
• “We contribute to the circular economy as a global leader in sustainability and eco efficient business practices.”
• “Building better communities is at the heart of the Group’s new strategy and delivering against the Group’s ESG agenda is key to achieving the strategic goal.”
• “Our purpose is to build trust in society and solve important problems.  It is this focus which informs the services we provide and the decisions we make.  Tackling climate change is core to our purpose as a firm.”
• “For us social value is not something we simply pay lip service to.  It is part of our DNA, completely embedded in everything we do.”
• “Striving to do the right thing is embedded within our culture.”
• “We are committed to being an impact company.  We are a company that aligns its mission with a model that creates local impact, close to the communities it’s supporting.”
• “Our sustainability journey is a continuous endeavour.  Embedding it into our strategy and culture is a core priority.”
• “A fundamental requirement of our day to day activities is that they must contribute to a more sustainable world.”

Trustee Statements
Trustee statements in Statements of Investment Principles keep a safe distance as possible from ESG considerations.  The Scheme’s journey plan to buyout provides a timetabling “get out” clause.  Unless they can be considered directly financial, the views and interests of members are explicitly ignored by most trustee bodies.

• “The Trustees also recognise that long term sustainability issues present risks and opportunities that increasingly may require explicit consideration.  The trustees have taken into account the expected time horizon of the Plan when considering how to integrate these issues in the investment decision making process.”
• “The Trustee does not take into account “non-financial matters” when making investment decisions.”
• “Our investment strategy is (1) to target an investment policy to achieve the long term funding target of 105% on a gilts flat basis by 2029 – 2032 and (2) to minimise investment risk, subject to expected returns required to meet (1). ​

C-Suite Pension Strategies has looked into a number of corporates and their pension schemes.  The gap is frankly wide between the corporate rhetoric on ESG and the trustee reality on pension funding.
Contact us to discuss the findings.

A new Boardroom led ethos reflecting its stated strategies would close the gap by giving trustees a modernised remit. 
End the endgame.  Link the past to the future.  All stakeholders benefit.

Is Transferring a Scheme to a Life insurer Really in Members’ Best Interests?
Questions and Answers
Should sponsors be encouraged to stay?

• Are discretionary benefit improvements possible?

Yes if agreed by all parties.  Few trustees ask for them.  When they do it’s usually without providing a package to entice the sponsor into being supportive.  High inflation rates may change that attitude.
Solvency II / longevity / inflation are uncertainties:  Buyout now?Wait and see.  Action now is a gamble on political decisions yet to be taken.  Apart from weaker Solvency requirements, known information means longevity tables when updated will reduce liabilities.  All round the costs of buyouts should fall.

• PPF vs FSCS safety nets:  What is the gap?

Modest upgrade in safety net from the well funded, well run PPF to the unfunded, untested FSCS provides almost the entire focus of the pension risk transfer industry.  Transparency:  An assessment of the value is needed.

• Who controls assets post a buyout deal?

Members lose all control over who provides their pension.  Input into what the investments are from an ESG perspective is lost.  The recent Prudential appeal decision means that anybody convincing the Prudential Regulatory Authority (PRA) “their money is good at the bar” can provide your pension.

• Solvency II:  How impactful?

The impact cannot be known.  The CEO of PRA thinks it is a “once in a generation event”.  The PM and Chancellor consider it a major opportunity.  Acting now is a bet on the outcome of fierce Government / PRA / Association of British Insurers debates.

• Is selling assets to fund collateral calls going on?

The sharp interest rate moves will require collateral pools to be increased.  Forced and untimely asset sales have been needed.  Con Keating calculates there are already massive losses arising from forced selling.  Certainly time to (re)read the legal agreement behind LDI.

• Longevity tables:  Are they fit for purpose?

Covid and the 2021 Census are not covered by the CMI tables.  Series 3 tables use data from 2011 to 2016.  CMI has recently confessed some of the input data was wrong.  Long term rates of improvement still “fix the figures” by building into minima even though there have been no discernible improvements for over a decade.

• Longevity swaps:  So far out of the money?

The risk transfer industry’s punt on longevity has provided insurers and reinsurers with profits so large it is an embarrassment to them.  The losses for schemes and their members structured into buyins is still not discussed.  Greater transparency needed.  

• Is better funding after the step up in interest rates a trigger for sale to a life insurer?

A scheme / sponsor that can afford a buyout can afford to run on with added back up.  It is time for all stakeholders to reflect on what they want to achieve.

• Do ESG and Section 172 matter now to corporates?

Most corporate Boards have become enthusiasts for ESG and S172.  The standard cold shoulder offered by trustees in Statements of Investment Principles to ESG / Impact Investment comes across as dated.  It plays up a narrow interpretation of fiduciary responsibilities.

• Life insurer profits:  Why so high?

The value of Rothesay and Athene (USA); the profits of Pensions Investment Corporation and the surpluses of the PPF show just how value has been transferred out of schemes to the insurance industry over the last decade.

• Members’ views:  Are they ever considered?

Members’ interests have been in accrued benefits being paid.  It is hard to impact on regulatory work to ensure that they are paid.  Now “independent” trustees are largely from actuarial consultants and legal firms and they look to the view of their industry and professional bodies for a lead.  The push to abolish member nominated trustees is a reflection of the gap between trustees and members.

• Should member votes / consultations ahead of annuitisation be required?

If trustees had to win a vote / consultation before a buyout there would be a healthy change in attitude all round.  The “added security” / “peace of mind” mantra would be tested - and replaced with the need to show it is the best, not the easiest most rewarding option for professional and insurers.

Members should consider their position and revolt.

The position of C-Suite Pension Strategies is that corporate sponsors need to “get stuck in”.  The industry is not working in either their or in scheme members’ best interests.

The 2004 Pensions Act introducing TPR and PPF was a success.  Higher cash funding and derisking have left many schemes well placed.  Schemes should now be revived on a modernised (C)DC basis.

The trigger for change is the ESG commitment of Boards and the risks in greenwashing.  Pension funding strategies provide excellent test cases of rhetoric against reality.  At the same time members should revolt.  With inflation higher than most scheme increase caps, then annuitisation is not a path to “peace of mind”.

Overall “endgame” thinking is inappropriate.  It is not the End: it is not a Game.
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A change in the premise of corporate sponsors to embrace from “get risk ASAP” can be transformational, showing how it is not too late for many sets of trustees to reengage with members and provide them with better outcomes.