News analysis: Reduced competition in the derisking market could limit value for schemes despite opportunities from rising gilt yields, Leadership summit delegates heard, while other market experts defended prices.
“The banks came in and improved the liquidity, the prices improved, [and it created] much better competition,” said Stephen Nichols, chief executive of The Pensions Trust, in a panel discussion on the subject.
What we do in a lot of schemes is have a series of triggers
“But perhaps I see the banks leaving… we might have improved the yields, but if we’ve got reduction in competition, then the prices will probably stay pretty flat, in my opinion.”
In August the Financial Times reported that Goldman Sachs was planning to sell its majority stake in specialist pensions insurer Rothesay Life as more stringent capital requirements made banks’ involvement in the market less attractive.
Less competition could see some schemes having to monitor the market for particular points where certain segments of their liabilities could be taken off the table, Nichols added, which he said created “a lot of work” for the scheme.
That has prompted a need for regular quotes from providers, delegates heard. Myles Pink, co-head of business development at Rothesay Life, said: “We’d like to have a group of pension schemes who are regularly receiving quotes on a particular block of liabilities so that we can monitor when can be a good time for them to transact.
Despite the speculation over its ownership, Pink added that “for Rothesay Life, we feel the market is as competitive as it ever has been”.
Other panellists were more certain about the value for money on offer. Peter Thompson, director at independent trustee company Bestrustees, said, “You can certainly get sensible, competitive quotes for things like buy-in transactions.”
Derisking pricing can be improved by having effective governance procedures in place to take advantage of opportunities, Thompson added.
“It is a question of making sure that you are set up as trustees – and if necessary with the agreement of the sponsoring employer – so that you can transact quickly when a circumstance arises.”
Derisking or re-risking
The session featured debate with the audience about whether companies should pay to derisk their schemes rather than investing to grow their own business.
Recent gains in developed market equities is also putting the question as to whether institutional investors should be taking on more risk in running their pension funds, rather than removing it from the table.
“If we do a see a run of good returns we might see a total switch-around, and people starting to think about putting risk back on the table,” said Nichols, though he warned this was not immediately foreseeable for The Pensions Trust itself.
Schemes are at different stages of their derisking journey, making it difficult to generalise, Thompson told the audience.
“What we do in a lot of schemes is have a series of triggers, so if the first trigger is hit we’ll do partial derisking, and then if the second trigger is hit we’ll derisk a bit more,” he said.
