Pensions is a scale game, where bigger pots of cash mean lower costs, more diversified investment and, hopefully, better returns. The government is intent on shifting pension fund assets into more productive and higher risk investments to help the UK economy as well as (and it sometimes feels secondarily) trying to improve the position of members themselves.

Hence the desire to supersize. First, there is the idea of a public consolidator, possibly through the Pension Protection Fund, which would sweep up small, underperforming defined benefit schemes that have no other options. Expanding on that, there is then the unifying theory of everything superfunds, as proposed by the Tony Blair Institute, which would crunch together the entire pensions market into a series of not-for-profit uber-funds. 

Third, there is the commercial superfund concept, the one the government seems most interested in. This is a for-profit pensions structure that could consolidate old defined benefit schemes — still a drag on corporate balance sheets, but short of the funding levels required for the gold standard surety of a buyout that transfers all liabilities to an insurance company. 

This idea to help schemes in limbo has itself been stuck between living and dead for some time. The government consulted on it in 2018, but only responded to that process this month. An interim regulatory regime, under the Pensions Regulator, was set up in 2020. Only one superfund has been authorised, Clara. It has yet to strike any deals.

Superfunds would replace the employer covenant behind members’ pensions with a capital buffer provided by investors, probably private equity. The conflicts of interest inherent in combining profit-seeking investors and protection of members’ benefits would be managed in a lighter-touch way than in the insurance world, enabling a cheaper route to getting pension obligations off companies’ books. This, as the Bank of England has pointed out, is ripe for regulatory arbitrage. It wanted superfunds to be used only as a stepping stone to a buyout.

These concerns and the uncertainty of an interim regime has stymied development of the market. Pensions trustees need a compelling reason to put members into a riskier regime, rather than continue working towards buyout — the most obvious one being the distress or likely insolvency of a sponsor that could pitch members into the PPF lifeboat, cutting benefits.

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The pensions market has transformed in the meantime. Higher interest rates have helped the DB market to record surpluses and funding levels, according to the PPF. Schemes told a year ago that they were decades from buyout have struck insurance deals. The average scheme, estimates consultants LCP, has funding at 90 per cent of the level required for buyout — a position where schemes should usually be waiting to achieve that goal. 

That doesn’t mean that there aren’t any deals for Clara to do. It offers a decidedly low risk “bridge to buyout” model, where schemes are also held separately to avoid issues of cross-subsidisation. 

But in its determination to kickstart the market, the government proposed this month throwing the doors open to racier models, co-mingled funds, earlier profit extraction and more principles-based safeguards to facilitate deals. There is some suggestion that greater risk could be tolerated within superfunds to maintain at least a 10 per cent pricing discount to insurance deals. Guidance expected soon from the Pensions Regulator will also address some of these points, including make it easier for investors to take returns.

The market could still struggle without a statutory regime. The risk of regulatory arbitrage remains. And a more gung-ho approach may not comfort pension trustees, obliged to put members’ interests first, when weighing up whether to take the plunge into superfunds. That is especially the case given the chances that this market comes under renewed political scrutiny around its investment decisions.

These superfunds may not be so supersized after all. 

helen.thomas@ft.com

This story originally appeared on: Financial Times - Author:Helen Thomas

Philip Morris International, the maker of Marlboro cigarettes, triumphed in tit-for-tat bidding against private equity group Carlyle to buy Vectura, a UK-listed maker of inhaled medicines, including treatments for smoking-related illnesses.

This story originally appeared on: Financial Times - Author:Helen Thomas

Reports have consistently espoused the importance of the sector and the UK’s strengths in terms of its leading universities, a strong research base, good skills and a centralised system in the NHS. The life sciences industrial strategy in 2017 laid out a “vision” to be a “global hub . . . for clinical research and medical innovation”.

This story originally appeared on: Financial Times - Author:Helen Thomas

Then there is broader “productive finance” angst, or the idea that long-term capital across pensions and insurance isn’t going into “growthy” investments that the economy really needs. Less than 1 per cent of the near-£5tn in pension and insurance assets is invested in unlisted UK equity, defined as venture or growth capital or private equity, says think-tank New Financial.

The government has spent recent years banging on about getting more money into infrastructure or other illiquid investments. This is an old theme given a new lease on life thanks to the on-off obsession with “levelling up”. 

Three-quarters of those LGPS funds are invested in equities and other risk assets. The trouble is, Ralfe told the Pension Investment Corporation podcast, much of it is overseas: 40 per cent of the money going into risk assets is in overseas equities, more than double the allocation to the UK stock market.

Last year’s levelling up white paper suggested that 5 per cent of local government pension scheme assets should go towards local projects, something some in the sector say was a red herring and a benchmark that many funds already hit. Pension trustees of all stripes rightly bristle at the suggestion of investment mandated by public policy goals lest the needs of UK plc aren’t best for their membership. But a corner of the pensions world with generous benefits and de facto taxpayer backing is at least a sensible place to be having that conversation.

A long-awaited consultation on the sector is promised as part of the Edinburgh reforms of financial services. Previous consolidation, under the coalition government, resulted in a halfway house with investment pooled into eight regional funds but with liabilities and asset allocation managed locally.

This story originally appeared on: Financial Times - Author:Helen Thomas

But from the end of March, there will be something it won’t price: systemic cyber risk, or the type of major, catastrophic disruption caused by state-backed cyber warfare. In one sense, this isn’t surprising. Insurance policies typically exclude acts of war. Russia’s NotPetya attack on Ukraine in 2017 showed how state-backed cyber assaults can surpass traditional definitions of armed conflict and overspill their sovereign target to hit global businesses. It caused an estimated $10bn in damages and years of wrangling between companies like pharma group Merck and snack maker Mondelez and their insurers.

But the move is prompting broader questions about the growing pains in this corner of the insurance world. “Cyber insurance isn’t working anywhere at the moment as a public good for society,” says Ciaran Martin, former head of the UK National Cyber Security Centre, now at the Blavatnik School for Government. “It has a huge role to play in improving defences in a market-based economy and it has been a huge disappointment in that sense so far.”

This story originally appeared on: Financial Times - Author:Helen Thomas

Last year’s trade agreement with Australia was “tailored to the UK economy,” we were told, a “historic” deal that would “create new opportunities for businesses.” 

Perhaps this meant historically bad: George Eustice, environment secretary at the time of the deal, said this week that it “gave away far too much for far too little in return.”

More assets are likely to be eligible for this treatment, as the sector wants. But the PRA has concerns over the calculation of the credit risks taken by insurers in their investments. It wants a tougher approach.

This story originally appeared on: Financial Times - Author:Helen Thomas

The pharmaceutical industry knows the feeling. The chief executive of Bristol Myers Squibb said last week he had a “significant concern” about the rising costs of a medicines levy, agreed between government and industry to cap the health service drugs bill from 2019. The scheme, welcomed at the time by the sector as pro-innovation, has ballooned in cost, in a way that the pharma industry says hurts investment.

Industry bleating about UK pricing is hardly new, particularly from US companies used to the peculiar and inefficient largesse of their own system. Getting a new drug on to the UK market rightly involves clearing exacting cost-benefit standards. Then the sector and health department have for decades wrangled over voluntary agreements that aim to balance the medicines bill with the desire to encourage innovation and provide access to new treatments.

This story originally appeared on: Financial Times - Author:Helen Thomas

Rather as political wannabes are regularly asked to prove they understand Real Life Issues by knowing the price of a pint of milk (up a fifth over the past year, as you’re asking), they should have a crack at the finer points of insurance regulation, an area of dread and mystery even for many in the City of London.

After all, our political leaders, both the outgoing set and those vying for the job, appear confident they know better than the pointy heads at Threadneedle Street or in Canary Wharf. It would be nice if they would prove that they appreciate the issues involved and are not just freewheeling for political effect.

This story originally appeared on: Financial Times - Author:Helen Thomas