Only 1% reach insurance, what about everyone else?

2018 was a record year for the risk transfer market, but only slightly more than 1 per cent of the outstanding liabilities (based on December 2018 Purple Book data) made the step to a more secure future through an insured transaction. Less than half of these transactions were full buyouts.

After a very successful decade, approximately £100bn of pension liabilities have transferred onto insured balance sheets. As DB shifts from accrual to run-off, pensions and insurance will increasingly share a future, but today more than £2tn of pension liabilities remain in occupational pension trusts. Buyout remains the preserve of the lucky few. It is our industry’s version of the ‘1 per cent’.

The regulatory regimes for insurers and pension schemes are not the same, have never been the same, nor were they intended to be

So what about everyone else? The insurance industry will continue to grow and absorb more liabilities, but a pension problem will require a pension solution.

Consolidation is part of that solution. The recent government consultation laid out a proposed framework and it is, of course, appropriate that it continues to be widely debated.

The danger is that the debate has become disingenuous. Rather than focusing on how to safely deliver improved outcomes for members, some are arguing to severely limit consolidation to protect the privilege of certain insurers servicing the 1 per cent.

With the appropriate safeguards, consolidation will improve member outcomes, allowing sponsors to focus on their core businesses and drive investment in the UK economy.

Safeguards are already in place and govern the operation of consolidators as pension schemes. Consolidators operate under the current pension framework with the benefits of regulation, governance and oversight that the trust structure provides.

However, a clear and robust regime for the authorisation and regulation of consolidators is necessary if we want to deliver the promise of consolidation: making pensions safer.

New ideas should be challenged, and it is only natural to fear something new. But consolidation is not new. Scheme mergers have long been commonplace and both the Pension Protection Fund and the insurers themselves are consolidators.

There are numerous models for consolidation, and Clara is designed as a bridge to buyout.

If the source of this fear is competition, it should be acknowledged and discussed openly, as it is a valid concern. Even moderately successful consolidation will challenge current service providers and could have an impact on the dynamics of the bulk annuity market.

There is no doubt that schemes that can buy out now should do so, but it is also clear that there should be safer options available to those members for whom buyout is not realistic today.

This is particularly important given that not all sponsors will remain solvent in the medium term, with some sectors under immediate disruptive pressure.

Swapping employer covenant for a substantial cash injection can improve members’ positions today and provide a low-risk, more efficient journey to buyout that is supported all the way by funded and permanent capital.

The argument for extending the Solvency II regime into pensions misses the point. The price of insurance remains unaffordable for most schemes and sponsors.

This is why members need alternative pension solutions, not another out-of-reach form of insurance. Solvency II is absolutely necessary at the point of run-off, but is unaffordable for most schemes and inappropriate for consolidators given the context of their dual balance sheets.

The regulatory regimes for insurers and pension schemes are not the same, have never been the same, nor were they intended to be.

Those arguing for some pension schemes to follow the Prudential Regulation Authority’s regime have not explained how they would draw a dividing line, or considered the unintended consequences of a such a change.

If, however, theirs is just a spoiler’s argument they must accept (and accept responsibility for) the cost of no action. The status quo for UK pensions has real costs: social cost for those members whose pension promise is not delivered in full; financial cost for business and the wider UK economy; and a political cost for those that fail to provide better outcomes.

The debate should not be pensions versus insurance. Instead we should all be focused on two things: delivering better outcomes for pension scheme members and making pensions safer. The test for consolidation is not whether an unaffordable alternative can do more, but whether members are put first and their pensions made more secure.

Adam Saron is CEO of Clara Pensions