Bulk annuity transactions are the “undisputed gold standard” to guarantee defined benefit scheme members’ pensions, ABI director of policy, long-term savings and protection Yvonne Braun has said.

In a letter to the Work and Pensions Committee chair Frank Field, providing additional information to the DB white paper evidence session on 6 June 2018, Braun argued that the insurance industry is better suited that the new superfund propositions to protect member benefits.

“The insurance industry remains the undisputed ‘gold standard’ for guaranteeing member benefits in DB schemes,” she said.

It was suggested that rather than “entrusting” the new superfunds with members’ benefits, The Pensions Regulator should work with trustees to help them to prepare for buy-out transactions, “especially where buy-out is the scheme’s stated long-term funding objective”.

Nonetheless, Braun noted that while “robust”, there are elements of the buy-in /buyouts process that are inefficient and disproportionate. Although costs of these transactions are driven partly by the valuation basis and Solvency II capital requirements, the ABI has put forward proposals on Solvency II to the Treasury Select Committee to help to “reduce process but not dilute member protection”.

She added that the ABI will also continue to make the case for a more flexible approach from the PRA when considering the eligibility of assets to back annuity business. Also the association is calling for the repairing of a mechanism call the Risk Margin, which the ABI said is “too large and too sensitive to interest rates.

“Making these changes will help make buy-out transactions more affordable,” Braun said.

“However, if it is stressed schemes we want to help, there are other means such as benefit simplification, pooling assets and advisory functions with other schemes that will improve their funding position.”

Braun also added that the Department for Work and Pensions’ proposal in the DB white paper that trustees of DB schemes must appoint a chair and for that chair to report to TPR with a chair’s statement, “are critical to ensure trustees have a clear objective (including buy-out where appropriate) and to avoid drift”.

It was reported at the end of May this year that bulk annuity transfers conducted by pension schemes have exceeded £15bn in 2018 so far.

According to JLT's latest Buyout Market Watch report, the uplift in bulk annuity activity in 2018 to date has been a result of trustees and sponsors taking advantage of favourable insurer pricing to tackle their liabilities.

JLT noted that at present, insurer pricing enables an attractive entry point for schemes across the market, with improving funding levels and increased sponsor interest encouraging trustee demand.

Share Story: