November 2009
"Rethinking Pensions" Will Fitchew is quoted:
A cash balance scheme accruing 15% or a member's pensionable salary each year. An investment return of 2% above price inflation would be guaranteed. On retirement, annuities could be secured with an insurer or paid by the scheme, depending on the sponsor's appetite for risk sharing. Variations in the cost of the scheme could also be shared with members. Pensions Week, 23 November 2009
"Buyout firms have to mind the pensions gap" Richard Jones comments:
"When private equity firms come to sell these businesses, and they haven't hedge their risk in the meantime, they may fund the scheme is in deficit." Financial News, 23 November 2009
'Northern Lights' David Cule is quoted:
But first David Cule, Punter Southall highlighted the complexity and unfairness of the current system. Simplicity, fairness and affordability should be the driving factors. Simplicity – that was a joke! He asked how many of us have any real idea what the state pension will be and when it is payable.
It was not fair – in comparison with the OECD countries, the UK basic state pension and pensions credit combined were very poor. The state pensions credit combined were very poor. The state pension reforms were just jiggling things about and not making anything fairer. Pensions World, 1 November 2009
'IASB drops plan to alter discount rate calculation' Peter Black is quoted:
Punter Southall principal Peter Black said one problem with the proposal was a lack of clarity about exactly what proxy would replace government bonds. "The respondents felt it wasn't clear what that would involve" he said. Global Pensions, 1 November 2009
'U.K. pension buyout market slowly returning' Richard Jones is quoted:
In a separate report titled, “The False Dawn,” Punter Southall Transaction Services officials said that lower activity in 2009 proved their prediction in 2008 that “despite the hype ... the (bulk annuity) market would not take off to the extent that some of the new entrants ... were optimistically envisaging.”
The report added: “We do not expect activity to pick up to any great extent in the foreseeable future.”
“Demand has fallen off a cliff,” said Richard Jones, London-based principal at Punter Southall and co-author of the report. He acknowledges that “everybody wants to get to” the point where they can offload liabilities, but argues that the gap between pension assets and annuity pricing is wider than insurers want to admit.
“That's going to take five years to fix,” Mr. Jones said. Pensions & Investments, 2 November 2009
'The Great Debate: Why the bulk-annuity market won’t revive' Richard Jones is quoted:
A bulk annuity buy-out is an insurance contract which allows a defined benefit pension scheme sponsor and its trustees to absolve themselves of their responsibilities in regard of the accrued liabilities to members.
During 2005 and 2006, the buy-out market saw new mono-line insurance providers challenge the more established and diversified market players such as the Prudential and Legal and General. Despite the attractiveness of certain aspects of this insurance product, the premium required makes buy-out too expensive for many pension schemes.
Successive government statutes establishing stricter regulation, more transparent accounting disclosures and substantial movements in asset markets have made defined benefit pension schemes an increasingly unwieldy and frightening animal for companies to manage on their balance sheet. Buy-out provides a means to remove this risk: reducing the likely volatility of contributions and the exposure to longevity and investment risk.
Further benefits from a company’s perspective are that insurance companies may potentially have more efficient administration systems, and lower investment transaction costs due to large aggregate fund sizes. From the member’s perspective, the credit rating of an insurance company and the stringent oversight by the FSA may provide a better guarantee of benefit promises being met, than had they continued to be sponsored by their employer.
However, the transfer of pensions risk to an insurer is expensive. An insurance company faces the very same risks as a sponsoring employer of a pension scheme, but is encumbered by additional regulatory constraints associated with operating within an insurance regime and the obligation to make a profit. As a result the cost of purchasing annuities has historically been prohibitively expensive to most.
To generate interest in the market some of the new participants priced aggressively. Legal and General continued to compete, whereas some of the other players such as Lucida, Rothesay Life and Prudential appeared to cherry pick deals. This led to deal volumes rising to 2.9 billion pounds in 2007 and 8 billion pounds in 2008.
As the difficult economic climate subjected insurers to increased reserving costs, companies became more precious with their cash and pension scheme funding positions often weakened significantly, coinciding with the removal of these discounts. The decline of sell and demand side appetite has caused the volume of transactions to fall significantly to 2.1 billion pounds over the year to date.
Prices have reverted closer to their historical average. Taking into account costs associated with insurance reserve and a profit loading, our research would suggest that 84 percent of the time it is not worthwhile for annuity contracts to be purchased.
This is re-enforced by the number of increasingly sophisticated and cost effective mechanisms for controlling the risks of a pension scheme. For instance, instruments can now be purchased to manage inflation and interest rate risk and there is a nascent market in transferring mortality risk, which this year has seen transactions occur with Goldman Sachs and Credit Suisse. Meanwhile a number of measures can be used to reduce the scheme size, such as member choice exercises, as recently offered by ITV.
Whilst each scheme is different and subject to its own specific circumstances, the buy-out market of the future is unlikely to see the activity witnessed in recent years. The most price-aggressive new entrants may well have written business at uneconomic levels, making future rounds of fundraising more difficult. Further, under realistic pricing buy-out remains too expensive when compared with the growing number of more flexible, better value money measures. Reuters blog, 2 November 2009
Punter Southall Pensions Bulletin - July 2010