“Learn what the rest of the world is like. The variety is worthwhile”

In selectively quoting Richard Feynman, Russell Lee and Tom MacAulay have repeated the mistake they make in their Professional Pensions article.  There is a whole world outside of insurance and there are a variety of solutions.

Like it or not, pension provision is a pension problem.  Today, there are in excess of ￡2.0 trillion of DB pension liabilities within pension schemes and “underwritten” by the covenant of UK plc.  This is close to 20 times the total volume of bulk annuities that have ever been originated.

An insured buy-out is rightly the “gold standard”.  Solvency II, independently enforced by the PRA, creates an objective measure of when an insurer can safely extract profit without compromising its short-term solvency and ability to meet remaining liabilities.

This is just one answer.  Can the Pensions world determine its own ‘safe’ level of capital and rules for the return of capital and profit?  I’m pretty sure there are plenty of pensions actuaries out there that believe they can.

The false debate between the language of pensions and insurance fails to consider other solutions to the twinned problems of run-off and profit extraction.  Clara-Pensions takes a different approach.  Set the amount of capital by reference to an external ‘safe’ benchmark - the gold standard entry price of buyout - and prevent any withdrawal of capital or profit taking until all members have their full benefits secured in the insured market. This creates a safer bridge to buy-out as capital always carries the first loss and would be badly exposed under a mismatched investment approach.

And as for price, this is a moot point.  Relative value will be determined by the market, and the market needs choice.  If L&Gs’ insured self-sufficiency is a workable solution then good!  A cheaper option for schemes in the insurance world should be applauded.

Regulation is required for all models to ensure that choice is made with clarity so that trustees can safely discharge their duty. 

If a solution is ‘too risky’ or ‘too expensive’ then the trustees’ fiduciary duty and the sponsors’ ability/willingness to pay will rule it out.  This is already a key feature of the bulk annuity market - where many deals do not proceed and others only with added protection (for example, collateralisation). Negotiations over security and price are already, and appropriately, part of Clara’s first transactions.