How would Mr Spock react to illogical inaction?

There are many corporate casualties of both Brexit and the pandemic. Sadly, several overseas parent companies are pulling out of the UK after many decades of providing jobs and security to UK workers. In most cases, their UK workers, both past and present, now face the uncertainty of what will happen to their pension promises.

Both sponsor and the trustees have a legal and fiduciary duty towards the members of the scheme. Third parties must comply with prevailing laws and, if their role is advisory must always give their best advice, absent of self-interest.

One such overseas company looking at what it might do to make good on their pension promises were advised that only distressed companies look at superfunds. This is bad advice. As a result, the overseas parent parked their due diligence even though a buyout is unaffordable. As a result, that schemes’ members are unknowingly relying on a highly volatile, if not failing, sponsor covenant for their financial security. 

Mr Spock might interject - "An illogical decision leading to inaction in the face of immediate danger."

Let me declare an interest. I am not impartial, as I work at a superfund, but I can still be saddened by the parent company’s misinformed view, formed by a third-party’s incorrect advice.

It is true that superfunds will save many distressed schemes, and it is also true that there are several schemes in that very situation right now. They are all praying that TPR will soon conclude its Phase One assessment of the Pension SuperFund (PSF) and no doubt other superfunds that follow on behind. I can foresee that superfunds of all varieties will save millions of scheme members from falling into the Pension Protection Fund (PPF).

However….

POINT ONE: Distressed schemes are NOT the primary purpose of a superfund.    

To support this first point, it is probably helpful for me to mention that at PSF we see SEVEN drivers of superfund interest, as follows:

To back up this important point even further, I have shared seven case studies below. Each case study is a typical example of many other client situations that share the same drivers.  Where applicable, I have also added a section at the end to bullet point the more interesting case variations that have arisen and the flexibility that PSF has developed in response. For confidentiality reasons, I have altered some details and figures.

*If you want a soft copy of the PDF of the case studies then just ask: [email protected]

Another myth worth debunking, based on the calibre of the clients ready to transact.

POINT TWO: Superfunds help stable sponsors and sophisticated trustees. 

For those who really understand what a superfund is, and isn't, the informed view would be that superfunds are a corporate financing tool with one purpose only: to solve the Gordian Knot (the hitherto unsolvable) problem that legacy DB pension schemes have become for many.

Looking at Jean-Simon Berthélemy's 1767 painting of how he saw that scene, I would like to think of Alexander the Great contemplating the two severed halves of the 'impossible' knot lying at his feet before crying out to the world "If only solving pensions was that simple!" but as the supposed timing was 333BC, probably a bit early for pension problems.

POINT THREE: A superfund transaction is a highly educated move.

Let us now return to the irrefutable logic of Mr Spock for some wise words on the subject of illogical inaction.

We have been considering the logical approach needed by both sponsors and trustees facing the buying decision relating to the settlement of DB pension liabilities.

Nine actors have played the character but these two are my favourite portrayals of S'chn T'gai Spock. (Apparently, his full name is unpronounceable by humans). I conceded that challenge long ago.

This rather comical look on Mr Spock’s face is the very same look I try to adopt when I hear someone justifying "the expensive purchase".

Can you tell that I have lived in Yorkshire too long?

Anyway, back to settling legacy DB schemes.  I propose the following analogy for the buying decision of a Risk Transfer Transaction for a DB pension, in its simplest form*.

A silly(?) example of the decision that some buyers face

Imagine that a new specialist shop offered a 15%-20% discount on a much-needed item that you have been saving years for. The specialist shop only sells that one thing and there is nothing else to look at. Along with the lower price, the specialist shop is the only place that stocks a newer model of the thing you need, with pretty much the same warranty and guarantee as the other shops provide. What is more, the new model will include 10% - 20% of extras that will arrive over time, and these extras are included in the discounted price. You can even forgo those extras for an even bigger discount upfront. The new shops are also more flexible on providing a lifetime waver on all your risks as a buyer.

You notice that the other shops only stock an older model of the thing that you need (and lots of other things that you don't need).  The other shops do compete on price between themselves but that's still 15%-20% more than this new model costs, even without the extras. You did ask about a lifetime waiver on all risks for the buyer but it's not their policy.

Despite the ups and downs in your finances and the sacrifices that you made over the years holding off other purchases, you did well and kept to your savings plan. That said, you had thought that you were still 10 years away from owning this thing that would solve all of your problems. You are puzzled that you can now afford the thing that you need given that you pay experts to keep you informed of new models and their far better value.

You hesitate. Some might say it's human nature. "Why is the specialist shop charging less?" seems to be the question asked by some people. You will walk away and take the risk of the problem getting worse. You plan to come back when your neighbour has one of the newer models - she always chooses wisely so when she thinks it's good enough for her, you can be more confident.

Others simply conclude that the old model is not even an option at this moment in time as it is financially out of reach anyway and their problems have exacerbated. For them, the purchase of a solution now is imperative. They console themselves that the old model doesn't fit their needs as well as the new model which offers a lot more flexibility and extras. They make their purchase and sort out the issue that they had been worrying about and now have a bit leftover of their planned savings for the rainy days that they are now facing.

When things change and you have a new option, it's OK to choose a different path.

"Once you have eliminated the impossible, whatever remains, however improbable, must be the truth."

-- SPOCK, Star Trek (2009)

Perhaps it wasn't such a silly example?

Would you decline a newer model at a much lower price? Even if you haven’t got enough money to pay full price for the older model and the newer model is a better fit for your needs.

People do. Many people in real life decline discounts on principle.

People do decline the logical choice that ticks all of their boxes because they don’t want people to think they can’t afford the more expensive item? We are influenced, unwittingly and subconsciously, by marketing gurus to equate price with quality. We often purchase more expensive products that don't quite tick all the boxes. The modern-day example is the beloved iPhone, which is an inferior phone to many others that cost far less AND provide a far more flexible and complete user experience.

But isn't an insured buyout the pre-ordained destination of legacy DB schemes?

Some folks believe that an insured buyout is the defacto end-destination for legacy DB schemes and that it has always been so. You are wrong. Never was, never is.

Bulk annuities only became a thing in the mid-naughties. Even the iPhone is as old as the established bulk annuity market. It's true. The first iPhone came out in June 2007, and that was only five months after Legal & General announced their first modern-day insured buyout, for the DRG Pension Fund, for the princely sum of ￡180m.

Just keep this one thought in mind...

Let me leave sponsors, trustees and their advisory teams who are contemplating a risk transfer decision in future, with this memorable Mr Spock quote:

"The needs of the many outweigh the needs of the few, or the one."

-- SPOCK, The Wrath of Khan (1982)

....maybe the quote should be modernised and Khan replaced with TPR?

I should end this Mr Spock themed article with "live long and prosper" but my actuarial colleagues would prefer that you live only as long as their calculations have suggested.

Enjoy the Bank Holiday.

Jay

07377 726549

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 * Naturally, if you can afford a buyout now or within three years (under BAU contributions) then you should do so. You should not even consider a superfund.