A workplace pension scheme is the most important benefit an employer can offer, according to recent research. Yet many employees are seeing benefits curtailed as companies try to reduce their costs. More companies are even selling off their pension schemes lock, stock and barrel to outside managers.
What do these deals – referred to as "pension buyouts" – mean for employees and pensioners? Contributors to a pension scheme are understandably concerned that their savings are in the hands of an organisation they may have never heard of instead of a trusted long-term employer.
The first question to ask is: is the company that is now running my pension scheme financially stronger than the company I work, or used to work, for? For all but the largest corporations it is very likely that the new pension manager will have more financial resources. Large insurance companies including Legal & General and Prudential are traditional operators in this market while established insurers such as Aegon, Norwich Union and American International Group are more recent entrants.
Newly established insurers including Paternoster, Synesis and Rothesay (a subsidiary of Goldman Sachs, a large investment bank) have also entered the market. Pension fund buyouts arranged with an insurance company are generally regarded as safer than those done by non-insurers. Insurers have greater experience in assessing risk – though even they have been caught out by the extent to which people are living longer – and they are regulated by the Financial Services Authority.
Insurers have to meet tighter standards for maintaining financial reserves and for eliminating deficits on the schemes they manage. They are more restricted in the investment risk they can take on while in the unlikely event of difficulties they are covered by the relatively generous Financial Services Compensation Scheme. In general, the regulators prefer buyouts to be carried out by insurers.
But there are non-insurers in this market including Citi, a US bank, that recently bought Thomson Regional Newspapers’ pension scheme, and Pension Corporation, a company specially set up to take over company pension schemes. Pension Corp bought Telent, a telecommunications services group that is the rump of GEC Marconi, and replaced the trustees of its £2.5bn pension scheme. But the Pensions Regulator insisted on independent trustees and installed its own appointees.
If your employer opts for a non-insurance buyer, the pension trustees should ensure the covenant or contract provides for any subsequent shortfall to be made good by the employer. A reputable employer will make sure that the terms of the buyout are acceptable to the Pensions Regulator.
But why would a company choose a non-insurance purchaser for its pension scheme? The answer is cost. Insurance companies are likely to be more cautious in their calculations so may demand higher premiums for taking over a scheme. The tougher rules governing insurance companies add to their costs. Non-insurers are freer in their investment strategies so may accept higher risks for what they hope will be bigger returns. However, tough competition for pension buyouts has been driving down costs so there is no longer a big difference between insurance and non-insurance bids, says Paul Belok, a principal at Aon Consulting.
By Charles Batchelor