03rd Jun 2020

Pensions innovation – capital-backed journey plan

Times are definitely changing and, whilst many of us are feeling the sadness of losing friends and neighbours, it’s becoming clear that some of this change is for the ultimate good.

The impact of the virus has, for instance, left many people with materially reduced income and a sense of what it could be like to retire without adequate pension provision. This may encourage a change in attitude, fostering a desire to save and increase individual contributions to pension arrangements.

Many companies are struggling with the lockdown requirements, with some seeing practically all of their income in Q2 & Q3 2020 suspended or lost. The ramifications of this virus will likely continue well into 2021 and possibly 2022. Compounding that misery has been the reduction in gilt yields, exacerbating gilts+ deficits in pension schemes and associated contribution requirements. Faced with the resulting financial pressures and assuming the gilts+ method of assessing funding prevails, those with defined benefit (DB) pension schemes may either give up and seek the Pension Protection Fund’s (PPF) help or start to look for others to help them fund their pension obligations using innovative products.

And the emergence of innovative products is what this article is about. Excitement was in the air when commercial consolidators first reared their head 24 months or so ago. But new ideas are often treated with suspicion and resistance (topped up in my view with a little self-interest from some corners of the market). This coupled with a lack of government majority meant that legislation to enable consolidation did not make it onto the statute book. Despite, or perhaps buoyed by COVID-19, such arrangements are once again gaining traction and, hopefully, we won’t have to wait much longer until commercial consolidation vehicles will be able to help many of those struggling sponsors.

Indeed, I have just come out of a seminar where another professional trustee was talking about preparing for the future. He was using The Pensions Regulator’s guidance on Integrated Risk Management to suggest that schemes should undertake huge amounts of work to consider all future scenarios from hyper-inflation to extreme lows, from long-term bear markets to rapid bulls, from large scale increases in mortality rates to improvements. Whilst nice in theory, the amount of money it takes for every scheme to undertake such hypothesis is astronomical and only good for advisors and professional trustees. Consolidation or schemes working together is the only way to do this efficiently.

Whilst consolidation finalises its entry to the market, a small number of other solutions have arisen. I’m not talking about the so called ‘DB master trusts’ that consultancies and third party administrators have set up to lock into their own services or gain market share. I’m talking about organisations that are offering to back pension schemes with their own money and external capital and offer investment or ‘end game’ guarantees. Such products are new and innovative but having completed on one last month, they are definitely available.

As a Trustee of a consolidation scheme who has first-hand experience of other routes, I see the merits in having a range of products that can help pension schemes and their sponsors. Whether a consolidation vehicle that targets a buyout in X years’ time is better than an investment solution backed by external capital and guarantees re buyout over the same period, is arguable but best left for another article. Consolidators that share value with members feel like they are offering something new and genuinely worthwhile.

Whichever way one leans, sponsors who want to do the right thing by their members (i.e. the vast majority of sponsors out there) now have other options. They no longer have to meet full buyout costs or be at the whim of insurers (who for the last two years have been very selective about when and for whom they would quote). With a combination of a forward-thinking sponsor and Trustee Board, such possibilities are within the grasp of many pension schemes. They can bring massive help to members of collapsed sponsors and help protect the PPF and levy-paying sponsors.

I’m not claiming that change will be easy. It rarely is. But any change that is worth having, is worth fighting for. Having contracted with such an arrangement (which we believe to be the first in the UK), it’s clear that many lawyers are understandably worried about anything new. We definitely need careful protection against scam schemes. In my experience though, capital providers are generally looking to work with sponsors and schemes to improve the position for all.

Sponsors that are brave and far-sighted enough to address such issues should ensure that their Trustee Boards are appropriately reinforced. This will help manage spend on legal and other costs and prevent derailment for what are often very small risks, or one-sided arguments. Let’s face it, very few professional trustees have actual experience of such matters, let alone lay trustees and much of the fee income derived by advisors and professional trustees in this industry is spent debating risks that are unlikely to arise in practice and on immaterial matters.

It’s now time to get practical and define a way forward that provides both members and sponsors with a near certainty of outcomes. For those who want to make a difference and change the way that this industry works, there are now routes available. You just need to know who to speak with…