BWD Pensions Roundtable:
Alternative Endgames

Issue 6: October 2024

BWD Pensions Roundtable: Alternative Endgames

In October 2024, BWD hosted a roundtable to discuss the variety and need (or otherwise) for ‘Alternative Endgames’.

Two BPA insurers attended along with the superfund, Clara, and representatives from across the industry, including professional trustees, employee benefit consultants, The Pensions Regulator (TPR) and Railpen – the DB and DC Master Trust responsible for the safekeeping and investment of around £34 billion on behalf of 350,000 members.

Before the event, I put the first question to the LinkedIn pensions community which produced an interesting response:

Not surprisingly, the vast majority of the (17%) respondents suggesting that we don’t need alternatives to buy-in/buy-out, were from staff at Bulk Purchase Annuity (BPA) insurers!

Nonetheless, 83% (103 out of 124) of respondents do believe that alternatives are needed, with a (perhaps surprisingly) large proportion citing run-on as a viable option. Read on to see if the roundtable guests shared these opinions.

The questions posed during the roundtable were:

Do we need ‘Alternative Endgames’ (to buy-in/buy-out)?
What are the ‘Alternative Endgames’?
What is TPR’s view?

Q. Do we need ‘Alternative Endgames’ (to buy-in/buy-out)?

To put this question in context, I provided the guests with some statistics taken from the Pension Protection Fund (PPF)’s purple book with data as at 31 March 2023.

The pie charts above illustrate that 81% (over 4,000) of the c5,000 UK private sector DB schemes have fewer than 1,000 members. However, these 4,000 schemes represent only 10% of the total £1.3 trillion of liabilities – with an average scheme size of just £30 million.

I also explained that the current run-rate for buy-in transactions is around 250 a year. So, even if this continued year-on-year, it would still take over 20 years to buy-in all c5,000 schemes.

Finally, the Purple Book also showed that 45% of the remaining 5,000 schemes are still open to benefit accrual.

“…Solutions might be different for big and small schemes…”

There was broad consensus amongst the attendees that solutions might need to be different depending on the size of the scheme. However, there was also recognition that BPA insurers have been innovating to make transactions for smaller schemes more efficient, making buyout attainable for smaller schemes and attractive to more insurers.

“…We used to see buyout as the ‘alternative’…”

Historically, it was pointed out, DB schemes were set up and managed to run-on indefinitely such that buyout was seen as the ‘alternative’ not the norm.

With funding levels now back over 100% for many schemes, the focus has shifted from paying off deficits and trying to get rid of the schemes, to exploring all options now available to trustees and sponsoring employers.

“…Acting in the best interest of members…”

In response to a question on whether acting in the best interest of members always meant pursuing buyout with an insurer, the recent legal case surrounding the Boots Pension Scheme was raised – where the scheme’s buy-in removed the discretion allowing members to take a full pension from age 60 leading to members raising concerns and unions pursuing legal action.

The recent decision by the Court of Appeal, to uphold the High Court’s ruling in the Virgin Meda v NTL Pension Trustees II court case relating to contracted-out scheme amendments, could have implications for schemes looking to secure benefits in the buy-in market or those who already have.

This could mean buyout is perhaps not the “endgame” that trustees and sponsoring employers expect it to be!

Q. What are the ‘Alternative Endgames’?

The results of my LinkedIn poll (above) showed there is widespread interest in DB consolidation and run-on, amongst other alternative endgames. Some of the alternatives explored during the roundtable are summarised below.

“ …1/3 : 1/3 : 1/3…”

Many schemes are now in “declared run-on”, meaning that the trustees and sponsor have agreed to run-on without aiming to buyout the scheme in the short (or long)-term.

This is often instigated by employers taking a holistic approach to pension spend, redirecting money from DB deficit reduction contributions (DRCs), to their DC scheme for current staff.

As an example, some employers have adopted a 1/3:1/3:1/3 principle such that their overall spend is shared equally between their legacy DB scheme, existing DC contributions and enhanced DC employer contributions.

A comment from one of the trustees in attendance was that: “…as long as the funding level is locked down to remove any chance of requiring DRCs in the future, then there is no obligation [on the trustees] to buyout.”

“…A spectrum of solutions…not one-size-fits-all…”

Insurers and employee benefit consultants talked about a spectrum of solutions ranging from full scheme buy-ins (and the guarantees this secures) to lighter-touch insurance and the development of capital-backed journey plans where a capital provider guarantees a specified funding improvement over a specified period of time, often with an immediate cash injection.

“…A means-to-an-endgame…”

The benefits of DB consolidation and superfund transactions were discussed, including the ability to “buy some time” to deal with data cleansing, GMP equalisation, clarifying scheme benefits, and illiquid assets in an efficient manner. These solutions could therefore perhaps be described as a “means-to-an-endgame” rather than an endgame in themselves.

“…A solution looking for a problem…”

Recent noise about the PPF acting as a public sector consolidator was described by one attendee as “…a solution looking for a problem…”

It was suggested that this was perhaps driven by the PPF seeking a reason for its continued existence (in a much-improved funding environment) rather than to solve any specific problem of inaccessibility to insurance.

Private sector solutions already exist (or could be innovated) to avoid the need for the PPF to act in this capacity.

Indeed, there have been calls for the PPF – which has reserves of over £12bn (as at 31 March 2023) and experienced claims totalling just £25.5m in 2021/22 and 2022/23 – to cut its levy to zero.

Whilst one of TPR’s purposes is to protect the PPF, it has not expressed a view on the PPF acting as a public sector consolidator, nor has TPR stated a preference of endgame options available to trustees.

TPR recognises the market risk of DB schemes has reduced materially over recent years – leading one attendee to ask: “…could we see DB schemes re-opening?” [Ed – this sounds like a topic for a future roundtable!]

Our thanks to….

Our thanks to EY for hosting our roundtable in their splendid More London Place office – along with everyone else who attended our BPA roundtable for your views and insight.

Get involved…

This was the second of a series of roundtables where we invite guests from across the pensions and insurance industries, both in the UK and globally.

Our previous roundtable looked at “Capacity Crunch in the BPA Market”.

Let me know below if you would like to attend a future roundtable on any of the following topics. And please feel free to suggest your own topic!

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Should DB schemes re-open?
DC/CDC
ESG/Responsible Investment
DEI
AI technology
Pension Risk Transfer in the US and/or Canada
Other (please specify)

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