With attractive insurance pricing and volatility in the markets, are pension schemes as engaged as they should be to benefit from these?
Since Facebook launched in 2004, social media has become a way of life for many of us. As well as catching up with old friends, we are increasingly looking at other people’s lives with envy/jealously, of the wonderful and amazing things they are doing, along with their stunning holidays. Some of us are suffering from the Fear of Missing Out (FoMO), a pervasive apprehension that others might be having rewarding experiences from which we are absent, such as social or earning potential.
Having worked with pension schemes over the years, they have an understandable long term view and a hope that “Things can only get better” (to quote a D-Ream song). But does that mean they are missing out on the here and now? So that led me to wonder, should pension schemes like us, suffer from FoMO, particularly when it comes to pensions insurance?
Since 2004, multi-billion pound transactions are now common, with these liabilities coming from schemes sponsored by household names such as ICI and Phillips. These and other schemes, have one thing in common. They saw an opportunity and entered the insurance market. To transact, they would all have had a governance structure to enable them to transact quickly, enabling them to take advantage of the pricing available at that time. The attractive pricing they secured could be down to one or more of these factors: investment volatility, previous investment decisions and insurer appetite.
Market volatility is one of the main drivers of attractive pricing and is due to a number of things. Last year, saw a great deal of volatility and it is hard to think this was a one-off as the global economy continues to grapple with current and future geopolitical uncertainty.
In the days and weeks after the Brexit vote, its impact was felt by gilt and bond yields, which improved annuity pricing relative to gilts by over 5%. Great for Schemes wanting to buy-in. The “Trump bounce” meant the average buy-out funding level during the last two months of 2016 increased from 57% to 64%, one of the highest levels seen in the last 5 years. Great for schemes wanting to buy-out. We have seen first-hand examples of both of these, what it meant for pricing and how schemes were able to take advantage of these sudden and beneficial opportunities.
Volatility and the pricing opportunities it brings, has and will continue to benefit schemes who are in the market. Schemes who have insurance aspirations but aren’t aware of the opportunities and don’t put themselves in a place to take advantage, will continue to miss out.
So a large number of schemes should be worried about FoMO. But rather than missing out, it should be Carpe Diem.