The traditional role for the pension fund buyout market in the UK has been securing the benefits for schemes that are winding up. Although there are exceptions, many of the recent buyouts are schemes that started to wind up, voluntarily or otherwise, before the current solvency rules came into place and so have been buying out with the available assets. Because of the lead time involved, it takes a while for these schemes to reach the end of the process but we believe that the pipeline of such cases is coming to an end.
As wind-up now triggers a debt equal to the difference between scheme assets and the cost of buying out the benefits in full, we expect that the number of voluntary wind ups will diminish as most plan sponsors will want to avoid incurring the debt. There will of course continue to be insolvency events but many pension schemes affected by insolvency will fall into the Pension Protection Fund, so avoiding the buyout market.
Most defined benefit schemes have now entered a phase that we call “managed exit”. Managed exit arises when:
• The scheme is in decline – closed to new members and possibly also to future accrual.
• The plan sponsor knows that the defined benefit pension fund model is not sustainable in the long term (a) because of the absolute cost and (b) because of the financial risks.
• The plan sponsor cannot (or doesn’t want to) afford topping up to buyout cost immediately.
• There is an inevitability that the scheme will be wound up in say the next seven to 10 years as it declines further and becomes viewed as a legacy arrangement.
In these circumstances the focus switches to identifying short term opportunities to reduce or de-risk the liabilities.
Offering enhancements to deferred members to voluntarily transfer, thus reducing the scheme’s liabilities is an obvious example of such an opportunity and many schemes are quietly pursuing this option.
This will result in a reduction in the scheme liabilities and the “managed exit” view is that between transfers, leavers and deaths, a point will come when the liabilities will be small enough for the sponsor to bite the bullet and buyout the remaining liabilities. This is usually conceptualised as a single transaction but in practice it makes sense to take advantage of any short-term opportunities that arise.
The market for the buyout of existing pensioner liabilities is highly competitive at present and it is possible to buyout at or around the same level as the accounting reserve for these liabilities. In our view this is a fantastic opportunity and one we are promoting very strongly. We believe that partial buyout in this way will fuel the buyout market for several years to come.
The buyout market for deferred benefits has also become much more competitive but is still relatively expensive compared to the accounting reserve and quite a stretch for schemes that aren’t fully funded – typically plus 20-30 per cent. However this market place is changing rapidly and we expect to see developments that may accelerate the pace at which buyout of deferred benefits takes place.
Andrew Dawson, director, Gissings.
