Discretion is the better part of value (2).pdf
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This document discusses discretionary pension payments and the risks of risk transfer transactions for defined benefit pension schemes. It argues that schemes should focus on actual rather than actuarial pounds and that trustees and sponsors can reassess objectives through risk management exercises. Case studies of pension schemes that underwent expensive and risky transactions are provided. The document proposes that consultants provide evidence of value from risk transfers and that schemes improve disclosures, consult members, and modernize objectives to incorporate discretionary payments and defined contribution elements. Overall it advocates for discretion over costly risk transfer deals.
Discretion is the better part of value (2).pdf
- 1. Discretion is the Better Part of Value Protecting DB Pensions From Wasteful Risk Transfer Transactions March 2023 Consider Discretionary Pension Payments for Past and Present Employees
- 2. 2 There is Value in Discretion and Risk Transfers have Risks ▪ Put discretionary payments by DB scheme on the agenda in inflationary time ▪ Concentrate on actual not actuarial £s ▪ IRM committees can devise proposals with upside for past and present employees while covering downsides ▪ Risk transfers have proved to be costly unforced errors ▪ Schemes and sponsors should focus on actual not actuarial £s DB schemes as ESG flagships: Endgame? Play on
- 3. 3 Can 2023 be the year members and sponsors re-engage? ▪ Actuarial valuations look much better given interest rate rises and inflation caps ▪ Funding code assumption of planning for endgames important – appropriate unless sponsor guarantees remain in effect. ▪ New concern : Will excess “hedging the measure” leave schemes exposed to cash run-off downward spirals? ▪ Inflation above Limited Price Indexation for first time since its introduction : Challenge to trustees to protect real value – as Goode Committee expected. ▪ Longevity tables introduce Tontine-esque scope for spreading pooled benefit through discretionary payments. ▪ Trustees and sponsors can reassess their objectives in Integrated Risk Management exercises.
- 4. 4 Use of longevity swaps and buy-ins and other unforced errors ▪ Siren calls for journey plans to deliver endgames often unfortunate. ▪ Extremely poor financial record of risk transfer transactions. ▪ The case for transparency: OCI in company accounts is used to protect earnings and hide financial impact. ▪ Regulatory arbitrage favours small group of life insurers over pension schemes. ▪ Solvency II replacement: FSCS review: Longevity table updates. ▪ Government wants more competitive market and better pricing. Time for a time out on risk transfer transactions
- 5. 5 Case Study I : Aviva IAS19 / IFRIC17 : The missing link : Regulatory arbitrage ASPS £m Premium Paid Recognised plan assets Loss taken to OCI 2021 (3 buy-ins) 2456 1760 696 2020 (1 Buy-in) 873 579 294 2019 (1 buy-in) 1665 1126 539 4994 3465 1529 AVLAP £m Premium received Recognised Gross insurance liabs Profit on buy-in 2021 (3 buy-ins) 2456 2184 272 2020 (1 Buy-in) 873 737 136 2019 (1 buy-in) 1665 1334 331 4994 4255 739 Scheme takes OCI hit : Group takes a pre-tax profit
- 6. 6 Case Study II : ITV ITV : Programme costs £m 2021 Assets 3873 2021 Liabilities 3943 2011 to 2021 DB contributions 941 2011 to 2021 DC contributions 185 2011 Longevity swap for £1.8bn 2021 Asset cost to scheme (600) 2018 Buy-in 530 2023 Buy-in value losses Longevity trends have been badly misread and swaps are “well out of the money” Buy-in loss on mark to market basis and the accounting write downs large
- 7. 7 Case Study III : Commerzbank Commerzbank : The Bank runs off £m 2012 to 2017 DB contributions 213 2018 Asset value 1081 Insurance policy 746 Write off to OCI 233 ▪ High longevity assumption: good lead indicator of coming risk transfer transaction ▪ Insurance annuity policies distributed to members in 2020 ▪ 2023 inflation rate 5% cap applies: Opportunity for discretionary uplifts lost
- 8. 8 Where did all the money go? Life insurers have prospered mightily while competitors have floundered Pension Investment Corporation has an impressive track record:
- 9. 9 Proposals ▪ Consultants to provide evidence that Risk Transfer Transactions have provided value. ▪ Scheme and company accounts to provide better disclosures and explicable notes : Accountancy bodies’ role. ‒ Legal and General / Rolls Royce give masterclasses in obfuscation ▪ Members to be consulted on risk transfer transactions: Solvency vs discretionary payments. ▪ Trustees to reset objectives as set out in Statement of Investment Principles: Consult members. ▪ Trust Deed and Rules modernised and to incorporate new (C)DC tier – which DB tier can fund. ▪ Sponsor aligns scheme with its ESG principles. Discretion to be Better Part of Pension Value