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Mansion House could pave way for alternatives to buyout

Imagining, debating and shaping new opportunities with Adam Saron and Gerard Ward from Greycross Partners.

The UK has the largest pension market in Europe, to the tune of £2.5 trillion. The government would love to harness that financial muscle to beef up British businesses, boost entrepreneurship and deliver a heartier return for savers.

However, buyout is currently viewed as the gold-standard solution. That means not enough pension money is going where it can have the most impact. Instead, it often ends up with insurers and their capital providers, and consultants who don’t have the time or freedom to reimagine the solution.

The Mansion House speech has allowed some fresh thinking. And it was music to the ears of Adam Saron and Gerard Ward from Greycross Partners. Greycross are independent advisers who help their clients think differently about financial problems. They have an ambition to see the pension industry deliver better outcomes for the people it was set up to serve: members, employees and sponsors. They’ve been exploring and creating alternatives to buyout longer than most – after all, Adam founded the Clara-Pensions superfund.

Adam and Gerard joined us for a recent Wednesday Wisdom to discuss the opportunities raised by the Mansion House speech.

Adam began with a disclaimer: they are not about ‘buyout bashing’. Buyout can be a sensible solution, but it’s not always the best next step.

‘Is buyout the right answer now? Quite often, but not always.’

Emerging ideas for alternatives to buyout

Instead, Adam highlighted emerging ideas that could offer an alternative to buyout. These ideas aren’t new, but the Mansion House speech has brought them to the forefront. These include:

Making more of surpluses
Instead of going straight to buyout, Greycross’ Member+ helps schemes implement a funding and investment strategy to reuse the surplus and generate more over time. Greycross claims that doing this with a scheme of just £300 million can realise up to £100 million over 10 years.

LCP’s 100% PPF insurance
LCP developed an alternative approach where the PPF remains a ‘backstop’ but provides 100% cover. Under this model, the benefits of investing DB assets could be shared across DB members, sponsoring employers and the (largely DC) retirement savings of those companies’ current workforces.

Pension Protection Fund as a public consolidator
The PPF believes that consolidation is a key solution. They propose a Public Sector Consolidator option, leveraging their experience and investment approach, which emphasises productive assets. While the PPF will continue its current operations, it plans to collaborate further with the government and industry on this initiative.

How to talk about alternatives to buyout

Despite buyout being ingrained on the agenda of pension schemes, it is notoriously tricky to communicate to members. Quietroom has worked extensively on the best way to talk about buyout to members, even creating a suite of ready-made comms that any scheme can use for a fixed price.

When not communicated with care, a buyout can create confusion, distress and a lot of angry phone calls to pension administrators. Scammers are all too ready to take advantage of any confusion. The cautionary tale is that for something to be in members’ best interests, it has to be communicated properly.

Now that the Mansion House speech has given the industry permission to speak about alternatives to buyout, we have to watch what we say.

Adam noted that he has heard at least 3 different definitions of ‘productive investment’ from the government. If it is something the industry must aim for, we should at least agree on what it means.

How we talk about surpluses is also potentially problematic. ‘Surplus extraction’ should be approached with caution, and only used if the intention is to distribute the surplus to shareholders. If the goal is to use surplus productively, Adam suggests phrases such as ‘protecting the surplus’, ‘safely generating additional surplus’, and being clear about how the surplus will be used.

Case study of an alternative to buyout

Gerard used a recent case as just one example of how alternatives to buyout can be explored. A company had a long-standing pension funding deficit, and they contemplated running the scheme on rather than executing a buyout. They:

  • explored various options, focusing on creating a reason to keep the scheme rather than pursuing a buyout
  • considered investment strategies to generate surplus, balancing it with security and a buffer to protect against risks
  • discussed how the surplus could be used for existing members and potentially expanding defined contribution provision
  • emphasised the importance of a collaborative approach and the need for an agreement to tie everything together

Governance and collaboration between trustees and companies were key considerations.

Ultimately, they found that the opportunity cost of a buyout was more than it was worth. They are now waiting for a final decision on protecting and growing the surplus.

So even when a buyout is on the cards, there are other hands a scheme can play to generate value before it folds.

Adam concluded that there is a herd mentality in the pension space. A change in mindset will be difficult. Mansion House has given people licence to consider other things.

‘We’re at a crossroads and many other schemes may consider other options,’ he said.

‘The route to buyout is embedded. We’ve seen that the corporate’s capacity to think about pensions has been downgraded. So when these issues are raised, the corporates aren’t properly resourced to think about it. We want to help them come to the conversation in a more confident way.’