An eye-catching deal is occupying the thoughts of the pensions and insurance industry. No, not the $108 billion battle to own Warner Brothers Discovery and all its movie treasures, but something more home-grown, more prosaic and of far greater importance — to Britain’s bus drivers at least.
Stagecoach, Britain’s biggest bus operator, has handed its £1.2 billion legacy pension fund to the asset management group Aberdeen in a deal type never encountered before. A conventional company is voluntarily, indeed enthusiastically, taking on responsibility for someone else’s defined benefit pension fund, and not as part of any wider takeover deal
At a stroke, 22,000 active and retired bus drivers will now be reliant on Aberdeen to pay their promised pensions. Aberdeen is as much on the hook for paying these pensions as it is to meeting pension promises to 13,000 of its own current and former employees.
For years, defined benefit schemes have been regarded as completely unwanted and toxic. Plagued by deficits and constantly requiring topping up, they are of no interest as a recruitment tool because sponsoring employers have long since moved to cheaper arrangements for current employees.
As Gordon Aitken, an independent insurance consultant, put it in a note, the deal is “unusual … because it moves in the opposite direction to almost everything we have seen for the past 20 years”.
Rising bond yields, increasing equity values and a slowdown in longevity improvements have strongly improved the funding levels of most of these schemes in the past three years. But, until now at least, no company has wanted to take on someone else’s scheme, even with the assets bigger than the liabilities.
The exception has been insurers, which are built to manage and hedge precisely these long-run risks. Many, such as Legal & General, Aviva and Pensions Insurance Corporation, have been absorbing defined benefit schemes in deals known as buy-outs, with aggregate deals forecast to hit £50 billion a year.
Aberdeen, however, is not an insurer and is not regulated like one. It sold its Standard Life operation to Phoenix seven years ago to pursue a capital-light strategy precisely so that it would not be burdened with such heavy capital commitments.
The deal has been painted as one producing winners all round. Aberdeen and Stagecoach get a share of the £50 million surplus in the scheme. So do the bus drivers, who have been promised a 1.5 per cent boost to their pensions in perpetuity and scope for more generous cost of living increases, including for pre-1997 service, the so-called frozen pension problem.
It looks pretty watertight. The scheme is in robust surplus and partly hedged. Aberdeen may not do insurance any more, but it has plenty of expertise in the arts of liability-driven investing and actuarial science, as Aitken points out. The covenant has, if anything, improved: Stagecoach’s credit rating is BBB-, as against Aberdeen’s BBB+.
But surpluses can turn swiftly into deficits in bond market shocks. And fund managers go bust a lot more frequently than insurers. Aberdeen was not so far from the precipice itself in 2002 — the centre of fury over split capital investment trust promotions and an investigation by the Financial Services Authority.
Neither The Pensions Regulator nor the Department for Work & Pensions is prepared to say they explicitly approved this pioneering arrangement, although the design is rumoured to have crossed the desk of the pensions minister Torsten Bell. The TPR only says the interests of members have to be paramount in any transaction.
That’s a pity for a trailblazing, but complicated, transaction of this sort, one that might produce tangible benefits for members if repeated elsewhere. Few might consider this route, but employers with DB schemes now have a fourth option — alongside buy-out, selling to a superfund (a new structure for absorbing DB schemes) or running on their scheme.
This is, emphatically, nothing like a Mirror Group Newspapers or a BHS — perhaps the two biggest pension scandals of the past 35 years. But for no one in authority to publicly OK such an innovative structure leaves the faint impression that regulators are not 100 per cent sure about it themselves.
PS: While on the subject of “frozen pensioners”, it sounded for a second in the budget as though the chancellor was significantly moving to help those whose retirement incomes for service before 1997 have not been lifted to adjust for inflation. In fact, only those whose schemes entered the industry lifeboat, the Pension Protection Fund and had previously promised pre-1997 indexation, will benefit. That amounts to 250,000 people, although it will only apply to future increases. There are no retrospective catch-up payments to compensate them for the brutal erosion of the past 28 years.
Moreover, it will not help 90,000 people in PPF-rescued schemes that never promised indexation before 1997, nor 139,000 in the other lifeboat scheme, the Financial Assistance Scheme, nor the 750,000 people in schemes still happily afloat but declining to give discretionary uplifts. But the reform has at least focused attention on the plight of frozen pensioners, no? Not according to Pat Kennedy, who chairs the Pre-1997 Pension Justice Alliance, and argues it was a ploy to muddy the waters.
With every year things are still getting worse. These are mostly people in their seventies, eighties and nineties who worked at a time when the expectation was that you worked for one employer all your life and in return they would see you right in retirement. Loyalty was matched by paternalism. Naive, old-fashioned sentiments these days, perhaps, but almost a million older people are now suffering the consequences of misplaced faith in that unwritten code.
It does seem paradoxical. Some of the UK’s biggest past and present employers (American Express, Johnson & Johnson, Hewlett Packard Enterprises, Pfizer, Chevron and KPMG) will, in future, be paying a PPF levy partly to address the cost of living squeeze on PPF-rescued pensioners, while refusing to help out their own ex-staff facing a similar problem.
patrick.hosking@thetimes.co.uk