28 March 2019
FTSE 100 pension scheme full transfers to insurers to soar from £5bn to £300bn in 10 years
A new report published by LCP has found that full transfers from FTSE 100 DB schemes to insurers through full buy-outs could increase from £5bn to £300bn in total over the next ten years as the pension buy-out market enters a new phase.
LCP’s analysis has found that, to date, the total volume of full buy-outs from the UK pension schemes of FTSE 100 companies currently amounts to less than £5bn out of £800bn of legacy pension liabilities as companies have struggled with large deficits. This is set to change following a big improvement in affordability. In the past two years, the average FTSE 100 pension scheme has seen its buy-out funding position improve by 10%, making a full transfer to an insurer increasingly attractive. This improvement in affordability has largely been driven by stalling life expectancies, good asset performance and strong price competition between insurers.
If current conditions persist, then LCP predicts a huge rise in FTSE 100 companies who can afford to transfer their UK pension schemes to an insurer in full, with up to 40 companies likely to reach or be close to fully funded on buy-out within the next decade, equating to £300bn of pension scheme liabilities.
LCP’s report discusses whether, as the demand for buy-ins and buy-outs grows, the market is approaching a tipping point where pension plan demand outstrips available insurance capacity.
To date, insurer capacity and pricing levels have kept pace with increasing demand but, at the current rate of growth, demand looks set to outstrip capacity over the medium term putting upward pressure on pricing and squeezing less attractive schemes out of the market. What is clear is that 2019 is set to be another bumper year for companies and trustees getting on top of their pension plan risks and liabilities. 2018 saw a record £24.2bn of pension liabilities transferred to insurers through buy-ins and buy-outs – nearly double the previous record of £13.2bn in 2014 – and we expect that 2019 could top £25bn for the first time.
Law to allow opposite sex couples to become civil partners gets Royal Assent
The Civil Partnerships, Marriages and Deaths (Registration etc) Act 2019 received Royal Assent on 26 March. This is a private members’ bill which the Government allowed Parliamentary time to pass as it accords with the Prime Minister’s announcement on this issue last October (see Pensions Bulletin 2018/39).
The Act provides (amongst other things) that, by 31 December 2019 regulations must be in force that amend the Civil Partnership Act 2004 (which currently only permits civil partnerships to be entered into between same sex couples) so that opposite sex couples are eligible for civil partnerships. It also provides that regulations may be made making any other appropriate provisions, including those relating to the financial consequences of civil partnership (for example in relation to pensions or social security).
Our understanding is that these regulations will seek to ensure that the current law on financial provision in relation to civil partners is extended on a coherent basis to opposite sex couples. This may result in an increase in contingent liabilities for DB schemes, depending on how their current rules governing dependants’ pensions operate. Although there are over 3 million couples potentially eligible for opposite sex civil partnerships, we do not expect large numbers to avail themselves of this new right and so, initially at least, the financial impact could well be marginal.
Separately, however, we are still waiting to hear how the Government intends to respond to the Supreme Court’s 2017 ruling in the Walker case that it is not permissible to discriminate between same and opposite-sex couples in respect of pre 5 December 2005 service (see Pensions Bulletin 2017/30). If the Government legislates to remove this limitation, which it seems that it must, the financial impact on some DB schemes could be more significant.
PPI report looks at the challenges for DC scheme investment in illiquid and alternative assets
The Pensions Policy Institute has published a thorough and readable report discussing the potential challenges for DC schemes seeking to invest in illiquid and alternative assets. The PPI says that illiquid assets are those where access may be restricted for a period of months or years after the initial investment is made, whilst alternative assets are those that are not as easy to access as standard, publicly listed equities or bonds.
This report comes during the consultation window for the Government’s proposals to encourage DC schemes to invest in illiquid assets (see Pensions Bulletin 2019/05) and will be a useful primer for those new to this topic.
The report explains the benefits of investing in illiquid and alternative assets as including:
- Illiquidity premium – the potential to deliver a higher overall return over time than liquid assets
- Low correlation with publicly quoted equities, and thus increased diversification
- Long time horizon – potentially a good match for pensions which are long-term savings; and
- Wider range of investment options – extending investment options beyond publicly quoted companies, the number of which is on the decline, according to the report
But all is not plain sailing for investment in such assets as the report makes clear when considering the challenges involved which are listed as:
- Higher costs
- Operational challenges – such as non-daily pricing; and
- Governance and regulatory challenges – such as transparency of costs
The report devotes a chapter to each of these challenges and the ways to overcome them.
The Government’s recent consultation makes it clear that it wants to nudge DC schemes towards greater investment in illiquid assets. This PPI report should help inform the debate about the pros and cons of this.
Over 1.5 million people to hit the LTA?
Lifetime allowance issues are set to become more common, with over 1.5 million working age adults expected to amass pension funds worth more than the lifetime allowance (about to increase to £1.055m) during their working lives.
Research published by Royal London, based on data collected in the Wealth and Assets Survey conducted by the Office for National Statistics, suggests that:
- Around 290,000 working age adults already have pension rights valued in excess of the LTA (fewer than half of whom have applied for any protection) and almost half are thought to be still adding to their pensions)
- Of the estimated 1,250,000 working age adults who are not yet at the LTA but expected to reach it in the future, most are still accruing DB benefits. Given that more than 6 million of the over 7 million people still accruing DB benefits are working in the public sector, it appears this is an issue that will affect the public sector more than the private sector
The paper notes that many of those affected will not consider themselves “rich” and will be unaware they could have LTA issues with the associated hefty tax bills. The paper suggests making people more aware of the risk of a large tax bill and ensuring people get financial advice as they are building up their pensions. Whilst the proposed pension dashboard would be an ideal place to address these issues given they range across all a member’s different pension schemes, it is difficult to see this complexity being addressed on the dashboard for many years to come. The different way pensions are valued for LTA purposes could also cause confusion.
Whilst it would be useful for trustees to make their members aware of the LTA, there isn’t much to do for many employees about to reach it, or for those that have already (without protection) reached it. If these members pull out of their workplace pension scheme they will lose out on the valuable contributions employers are making on their behalf – this, for most, will be worse than suffering the penal tax rates associated with the LTA charge.
So maybe the onus should be on employers, particularly those in the public sector, to consider if they want to find a more tax-efficient way of rewarding those employees whose excess pension savings attract such a high rate of taxation.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.