It is no secret that most employers would give their eye teeth to be shot of their pensions liabilities. But, like husbands and divorce, they just can’t afford to. It costs a lot of money to persuade someone to take a high risk business like pensions off your hands. The price of freedom from future grief requires handing over enough cash to fund the pensions, calculated on the assumption that members will live up to about age 100, plus oodles of capital to protect against adverse market conditions. Then, there must be a little extra – actually quite a big bit extra – for the acquirer, his margin.
Given most pension schemes are in deficit, without enough to meet even their basic liabilities, it is hardly surprising only a few have been so flushed with cash they could splash out on luxuries like casting adrift life’s annoying millstones.
But that will change over the next few years, if recovery plans pan out as the Pensions Regulator envisages. Most funds should be back in the black within the decade, at which point the economy may be booming to such an extent that it will be a case of “carpe diem”. Finance directors may consider that failing to seize the day, and secure a buy out, could amount to sheer recklessness.
Before too long, there may well come a point where the bulk of final salary schemes are no longer in the hands of employers, but with insurance companies.
Insurers have always played a backstop role in occupational pensions, annuitising on wind-up in the days before the Pension Protection Fund.
Legal & General and Prudential were the traditional giants in this field. Lately, sniffing money to be made, interest has perked up at other major insurers, such as Aviva and MetLife. More aggressive, has been the entry of new bulk buyout operations, like Paternoster and the Pension Insurance Corporation.
Yet, amid all the enthusiasm for buyouts, who is looking after the interests of members?
I was told by the FSA that no insurer had gone bust. Leaving aside Nation Life, London Life, AIG, or, wash my mouth out, Equitable; and having just witnessed the collapse of most of our banks, the days have gone where we can take any organisation on trust
This is important, because the insurance industry has form when it comes to buyouts. Millions of consumers who bought contracts with reputable companies are now locked in closed funds such as Phoenix. The experience has not been pleasant. Policyholders have been dogged by poor returns, brutal communications and administration, while forced to watch their investments change hands faster than falling leaves after a November frost.
When it comes to pensions, while buyouts remove from employers the headache of future shortfalls, they do not guarantee the pensions of former employees. What happens if the buyer goes bust?
I put this question to the FSA, to be told that no insurer had gone bust. Leaving aside Nation Life, London Life, AIG, or, wash my mouth out, Equitable, and having just witnessed the collapse of most of our banks, the days have gone where we can take any organisation on trust. Think about it. An insurer with BT, BP and Shell pension funds on its books. And when sorrows come, they come not single spies but in battalions. Apologies for moving from Horace to Hamlet, but you get the point. If some disaster we can’t now predict strikes at the heart of one company, as with the banks, before long contagion spreads and we have a major catastrophe on our hands.
Another concern is that some of the new entrants may have sold their services too cheaply in order to kickstart the market. Will this one day return to bite them? Valuing liabilities is an act of faith and assumptions made today may look ridiculous in 60 years’ time. If disaster did strike, in theory, victims would be picked up by the Financial Services Compensation Scheme, paying 90 per cent of pensions owed.
Would it really? The safety net, funded by a compulsory levy on the industry, has never been tested on such a scale, and we can all guess at the likelihood of it rising to the challenge.
Trustees considering buyouts could do worse than brush up on their Horace, who followed carpe diem with “quam minimum credula postero”.
“Trust as little as possible in the future.”
Teresa Hunter is personal finance editor of Scotland on Sunday