BoE bailout

[Deleted User]

Like Biscan explained, DB schemes are in a better position than a year ago.  

But I do wonder what would happen if a recession were to hit leading to a sharp reduction in interest rates while leaving asset prices low.  Now is probably a good time for companies to offload  their DB pensions to insurance companies. 

jimi_man

A_T said:

arnoldy said:

What this question re-enforces is that we should not be talking of DBs as one entity. Pensions should at the very least be split into 3:

1. Public sector (Government) DB pensions
2. Private DB pensions
3. Private Defined Contribution (DC) pensions

The difference between private and public DBs is enormous - recent market turmoil has no effect on public (government) DB pensions but has triggered much squeaky bum time about private sector DBs and their funding health. If private DBs go bust mild (at least) poverty awaits as the private DBs schemes go bust & are lowered into the pension protection fund.

some public sector pensions have no worries at all e.g. NHS and teachers. They don't have any funds and are just paid out of the Treasury like state pension. Others like LGPS, police, university lecturers are potentially vulnerable because they have their own funds.

The police is unfunded, same as teachers, NHS, Civil Service. 

Pensions_matter_2

My understnding in that annuities, as long term insurance contracts, are 100% guaranteed by the FSCS? 

[Deleted User]

Pensions_matter_2 said:

My understnding in that annuities, as long term insurance contracts, are 100% guaranteed by the FSCS? 

Yes. 

There is always a question though whether the state would  honour such contracts in a financial meltdown scenario with multiple insurance companies failing at the same time.  Probably won’t. Its a very low probability, high consequence scenario. 

arnoldy

Deleted_User said:

  Now is probably a good time for companies to offload  their DB pensions to insurance companies. 

Unless you are a member of said scheme!!

Albermarle

arnoldy said:

Deleted_User said:

  Now is probably a good time for companies to offload  their DB pensions to insurance companies. 

Unless you are a member of said scheme!!

The insurance company has to pay the same benefits as the employer scheme. In fact you would probably be safer with a huge financial institution.
The problem is that the insurance scheme demands a high price for taking on the liabilities, so many DB schemes shy away from this option AFAIK

dunstonh

arnoldy said:

Of more concern is the annuities market. Investment/insurance companies buy gilts to underwrite the annuities - the prices of gilts have crashed, but the liabilities of these insurance companies on the annuities remains enormous. If I had an annuity I would sweating a bit - both because of the financial health of the insurance company and the effects of inflation eroding its value. As sadly is so often the case the quangos and regulators have been asleep/not sharpest knifes in draw.

Annuities have 100% FSCS protection with no upper limit.  Gilts form a major part but insurers buy with the intention to hold them to maturity.  Interim swings wouldn't worry them.

It is gilt yields that were the driver.  An annuity from a year ago, would have got an annuity rate reflecting the yields available at the time.   Just as those buying today will get a higher annuity rate because of the higher yields.

Inflation-linked annuities are not eroded by inflation.  Level annuities are.   

[Deleted User]

arnoldy said:

Deleted_User said:

  Now is probably a good time for companies to offload  their DB pensions to insurance companies. 

Unless you are a member of said scheme!!

In general it would improve security for the members.  Insurance companies do go bust but its extremely rare compared to the rest of the industry.  

biscan25

Deleted_User said:

Like Biscan explained, DB schemes are in a better position than a year ago.  

But I do wonder what would happen if a recession were to hit leading to a sharp reduction in interest rates while leaving asset prices low.  Now is probably a good time for companies to offload  their DB pensions to insurance companies. 

This is exactly what the industry is advising clients to do now. There's plenty of capital capacity in the insurance market to get these deals done, but the insurers' limiting factor is manpower, despite throwing £££ in recruitment over the last 5 years.

Insurers are MUCH safer than a pension scheme for members, and buyout is the gold standard for security. Insurers have to hold huge amount of capital under solvency requirements - enough to meet there obligations up to the 1/200 scenario (although post Brexit, ministers are seeking to weaken this). They don't hold leverage, as this would increase their capital requirements even more.

MarkCarnage

Couple of points from the above.....

For most large DB schemes this was and is principally a liquidity issue rather than a funding issue....as has been commented, most schemes are in a stronger funding position than a year ago due to the significant rise in gilt yields. 

The simple maths is that even if all DB schemes were well enough funded to hedge all their liabilities by holding matching gilts  (they're not in general), the gilt market simply isn't big enough for them all to do it holding physical gilts, particularly after QE, which reduced the supply by the BoE 'crowding out' with its purchases and drove down yields which worsened the funding of many schemes....financial repression at its finest. QE was allowed to continue far too long. This meant that DB schemes who wanted to hedge their liabilities - or whose sponsor wanted it - often had little option but to use some form of leveraged LDI. 

Insurers capital adequacy regime is pretty robust, if they were to go bust I would suggest that there's likely to be more worrying things than your pension........