Antony Barker's presentation to the Pension PlayPen of the outlook for UK pensions.

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Stagflation not
Stagnation
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 Antony Barker
 Managing Director, Disruptive Capital
 Pension Playpen - August 2022

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….for the first UK private sector DB scheme!
Blame the energy companies

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Blame the banks, the media….
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and Boots, Cadburys, Courtauld, Imperial Tobacco, Coats, ICI…
Lloyds
Coleman

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The Conference of Superannuation Funds
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• 1936 - 6544 private sector schemes
were in operation (75% for
administrative or clerical staff)
• 1956 - 37,000 schemes (covering 1 in 3
workers).
• 1970 - 78% of non-manual, 50% of
manual and 38% of unskilled manual
workers were members
of company pension schemes.

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Diamonds are forever….but companies aren’t!
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 July 1935 – Launch of Financial
News 30 Share Index
 Of the original industrial and
commercial constituents only
Tate & Lyle and Guest, Keen &
Nettlefolds remain
 A third of FTSE 100 companies
have failed or had serious
financial difficulties since 1985
 50 to 100 funds enter PPF
assessment every year
 Except recently!

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£1.7trn of Assets, even more Liabilities
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Source: PPF Purple Book at 31 March 2021
DB Schemes Buy Out Funding Level

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Solving complicated with innovative
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What’s changed?
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Falling yields….and now rising inflation too
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..but most DB sponsors are no longer “growth” companies

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A familiar story?
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It’s not just energy, the war….
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Source: ONS

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Shocking behaviour?
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Inflation
Employment
Boom
• Positive demand shock
• Post-Covid
Goldilocks
• Positive supply shock
• New technology
Recession
• Negative demand shock
• Credit crisis
Stagflation
• Negative supply shock
• Oil price
…or should we really beware the quiet ones??

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“Longevity is not working”
 1908 – UK State Pension introduced
 Life expectancy at birth = 47 years
 Life expectancy at SPA (70) = 9
years
 Today
 Life expectancy at birth = 90 years
 Life expectancy at SPA (66) = 19
years
 1:10 chance of living 30 years!
 Females even longer
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Price of Information v Value of Knowledge
 Typical scheme expense reserve = 1-2%
 Equates to £1bn-1.5bn paid away every year
 Administration = 30-40% according to size
 Investment = 20-40% by size/complexity
 Independent trustee and advisor costs = 40%+
 Halved in very large schemes with internal
resources
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Source: IFF for TPR 2014

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….and not enough trust

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z What now?
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Longevity – the biggest known unknown
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There will always be a market for insurance
• Volumes have reduced from 2018/19 highs
 Expected to rise with increasing DB pension scheme maturity
and strengthened funding positions, bolstered by TPR’s
scheme specific funding regime
• As schemes mature and derisk investment strategy,
managing longevity risk becomes more important
 Mid-sized (£100-500m) transactions expected to
form the largest part of the market in coming years
 May be event-driven by sponsor insolvency where
the scheme has surplus assets to secure benefits
above PPF compensation
• The Pension Schemes Act 2021 will encourage
sponsors to divest their pension obligations to avoid
constraints on future corporate activity
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Source: Hymans Robertson Risk Transfer Report 2021

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We’ve never had it so good!
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Assets
Buy-in
Self-Suff’cy
s.179

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So why can’t you do a deal today?
 Active accrual
 Insurer doesn’t cover deferreds.
 Fixed or “generous” factors in member options.
 Risk of adverse selection
 Scheme assets don’t meet Solvency II eligibility
and can’t be easily sold/transferred.
 No legal sign-off of benefits.
 Poor data (e.g. spouses) or experience.
 GMPs not resolved.
 Ongoing liability management exercise
 Need “all risks” transfer
 Conflicts of interest
 No insurer market capacity left
 Better opportunities than UK BPA
 Scheme governance:
 No feasibility done
 Company and trustee not aligned
 No professional trustees
 No experience
 No plan
 Not a high enough profile sponsoring company brand
 Not big enough
 Not a large scheme or one of multiple group
schemes
 Particular issue for PPF+ cases
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What’s not changed?
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Time to Teslafy the industry??

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Alternative Covenant Schemes
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100%
110%
N-Years
X% confidence corridor
Y% confidence corridor
Price-lock and Asset-lock associated with the DB scheme receiving a material
(external capital) addition to assets, kept in escrow or structured as a
collateralized option/swap.
Allows Trustees to follow an investment strategy and liability management
approach designed to hit a surplus of, say, 10% against a prudent self sufficiency
basis within N years’ time
Time
Current funding level
Now
Self-sufficiency funding level
Desired target level, say
c.110% of self-sufficiency

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Difficult times need difficult decisions
We have the worst of all worlds:
 Complex, inefficient and misunderstood pension system is ill-placed to meet rising demands
 Financial and COVID crises and their aftermath have produced a weaker economy that is
struggling to generate the money to pay the pensions that people expected
 Private sector pensions are underfunded and sponsored by the companies that can least
afford them – the promise will outlive the promiser
 Giving up on risk assets just increases the debt on the employer.
 Trusted advisers…..no trust and no advice???
But if these are the best of times, then…
 Pensioners and sponsors need rescuing today!
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 Vision without action is merely a dream;
 Action without vision just passes the time;
 Vision with action can change the world!
[Barker, 1991]
So Do Something!!!!
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