What's Hot

    M&G agrees two bulk purchase annuity deals totalling $760m

    21 September 2023

    ELSA Welcomes New Executive Board Members

    19 September 2023

    Editor’s Letter – Volume 2, Issue 9, September 2023

    15 September 2023
    Facebook Twitter Instagram
    Instagram LinkedIn Twitter
    Life Risk News
    • Home
    • Features

      Spotlight Falls on US Life Insurers’ Private Debt Investments

      14 September 2023

      The US Now The Last Remaining Traded Life Policy Market

      14 September 2023

      Re-Visiting the SEC Life Settlements Task Force More Than a Decade Later

      14 September 2023

      Generative AI Set to Transform Life Insurance Industry

      14 September 2023

      Q&A: David Blake, Professor of Finance & Director of Pensions Institute, Bayes Business School

      14 September 2023
    • Commentary

      The Critical Nature of Life Insurance Policy Due Diligence in the Life Settlement Asset Class

      14 September 2023

      Covid-19 Excess Mortality Analysis

      14 September 2023

      The Insurance Regulator Takes a Look at Funded Reinsurance

      10 August 2023

      Life Settlement Apocrypha

      10 August 2023

      UK Closed Life Funds – A Secret Returns Goldmine?

      12 July 2023
    • Events
    • Magazine
    • News

      M&G agrees two bulk purchase annuity deals totalling $760m

      21 September 2023

      ELSA Welcomes New Executive Board Members

      19 September 2023

      Prudential Financial and Warburg Pincus back new annuity reinsurer

      14 September 2023

      Ford UK pension scheme signs $450m partial buy-in deal

      14 September 2023

      European Life Settlement Association (ELSA) Hosts Successful Secondary Life Markets Conference 2023

      13 September 2023
    Subscribe
    Life Risk News
    Home»Commentary»Proposed DWP Regulations May Hasten the Demise of DB Pensions in the UK

    Proposed DWP Regulations May Hasten the Demise of DB Pensions in the UK

    Commentary 12 October 2022Roger LawrenceBy Roger Lawrence
    Twitter LinkedIn Email
    Pensions
    Share
    Twitter LinkedIn Email

    Defined Benefit (DB) pension schemes in which the employer bears the investment and longevity risk have been on a downward journey to eventual extinction in the U.K. and many other jurisdictions for years. Extending life spans and low investment returns have combined to make running these schemes far too operationally risky for most employers including many of the largest. To cap increasing liabilities, most have either closed to new members (the lowest level of intervention), through to also stopping new accrual of entitlements for existing workers, and on to eventual buy-out or other run off strategies. The market for these risk transfer or sharing arrangements has grown rapidly in the U.K.

    New proposed U.K. regulations, the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023, have been launched in draft form in July and are now open for public consultation with the deadline for feedback set at 17 October 2022. This will then be considered in finalising the regulations with a view to bringing them into force next year.

    As the title of the regulations suggests, the focus is primarily on future investment strategy, and in further de-risking. In the terminology of the document, regulators are seeking to achieve a state of “low dependency”. A scheme with low dependency is one where the employer no longer needs to make additional contributions or, in effect, the scheme is self-financing. Depending on the actuarial assumptions used for this assessment, it should mean that schemes are, more or less, ready for a final buy-out or equivalent when they are in low dependency. The trigger for a scheme to start these preparations is reaching a defined a level of “scheme maturity” based on the weighted outstanding duration of liabilities.

    The intention is to try and improve member’s security of benefits and a gradual reduction in the number of inadequately funded schemes having to revert to the Pension Protection Fund (PPF) lifeboat. One of the most high-profile uses of the PPF, which involves a 10% haircut to members’ benefits, was British Steel, which is a classic example of a legacy pension fund covering an industry whose current workforce is considerably smaller than it was historically. This leaves behind a huge legacy benefit liability, with a much-diminished operation to make good any shortfalls.

    From an investment perspective, the regulations will drive a rotation from risk-on to risk-off assets, but because future returns are potentially more limited, it will create an estimated £200bn of additional liability added to employers’ future commitments.

    The view is that this legislation will hasten the runoff of remaining DB schemes but there is concern amongst actuaries as to whether existing capital resources – almost invariably reinsurers – will have sufficient capacity to deal with this. Buyout levels are estimated to accelerate towards annual capacity requirements of £200bn a year. In 2019, estimates of market size were £43bn, and in the Covid-19 years of 2020 and 2021 this fell to around £30bn each year. It is certainly an opportunity for capital markets to engage, especially if they can sharpen their offerings.

    The biggest risk for markets looking to gear up ready to participate is the one of whether the legislation proceeds to statute. Undoubtedly, the additional expense of migrating to a low dependency investment strategy will be a drain on employers’ resources and around 5% of schemes are already in the same position as British Steel were: a large pension fund and a now much diminished sponsoring employer. Applying the regulations to all scheme/employer situations alike may well lead to employer insolvencies and job losses. At a time when the world looks like entering a period of slowdown with pockets of recession expected, not least in the U.K., this might be a difficult political move to pull off and the legislation could end up being deferred.

    At the moment, there is little noise of dissent beyond the Pension Scheme Village, but as employers wake up to some of the implications this does have the potential to capture the mainstream media with its preference for emotive impacts (i.e., job losses) rather than obscure technicalities. However, most affected schemes and employers won’t be entering “scheme maturity” and therefore having to implement the low dependency rules for a few years hence so the political counterargument required to push these rules over the line will be that the current economic squeeze may well be short term, whilst this program to secure members’ benefits is a much longer project.

    Roger Lawrence is Managing Director at WL Consulting

    Volume 1 Issue 6 - October 2022
    Share. Twitter LinkedIn Email

    Related Posts

    The Critical Nature of Life Insurance Policy Due Diligence in the Life Settlement Asset Class

    14 September 2023

    Covid-19 Excess Mortality Analysis

    14 September 2023

    The Insurance Regulator Takes a Look at Funded Reinsurance

    10 August 2023

    Life Settlement Apocrypha

    10 August 2023

    Comments are closed.

    Most Popular

    Spotlight Falls on US Life Insurers’ Private Debt Investments

    14 September 2023

    The US Now The Last Remaining Traded Life Policy Market

    14 September 2023

    Re-Visiting the SEC Life Settlements Task Force More Than a Decade Later

    14 September 2023

    Generative AI Set to Transform Life Insurance Industry

    14 September 2023
    Ad

    Your trusted source for capital markets participation in Life Risk

    Twitter Instagram LinkedIn
    Life Risk
    • About Life Risk News
    • Get In Touch
    • Our Team
    • Copyright Notice
    • Privacy Policy
    • Sitemap
    Coverage
    • Home
    • Features
    • Events
    • Commentary
    Subscribe

    Type above and press Enter to search. Press Esc to cancel.

    We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
    Cookie SettingsAccept All
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
    CookieDurationDescription
    cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
    cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
    cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
    cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
    cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
    viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
    Functional
    Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
    Performance
    Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
    Analytics
    Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
    Advertisement
    Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
    Others
    Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
    SAVE & ACCEPT