Why do pension funds need a NED with previous BPA or insurer investing experience on their board?

Alistair Brindley our consultant managing the role
Posting date: 05 December 2023

Over the last year or so, the Liability Driven Investment (LDI) crisis has significantly changed the financial landscape for pension funds. Thanks to strategic hedging against anticipated risks and the unexpected high inflation, pension funds are flourishing. This newfound stability and security have nudged even more of them towards a buyout by insurers. 


Yet, with the urgency for buyout and a mismatch in the type of investments insurers and pension funds hold, pension funds run the risk of not getting the best returns. It’s important, therefore, that whilst preparing for buyout, pension funds gradually change the way they invest to mirror the insurers. 


Why? Because without direct experience of investing like an insurer, it’s hard to shape the investments correctly. This can be most easily rectified with the addition of a NED who has direct experience of investing for an insurer.


Of course, not all pension funds go to buyout, and trustee boards might be inclined not to do so in the knowledge that they’ll be losing their jobs. But even if you aren’t going to buyout, it’s still important to change the way a pension fund is invested, especially if all other funds are going to be invested in the same way as insurers are.


Continue reading to understand the differences in the way pension funds and insurers are invested, why non-executive directors (NEDs) with bulk purchase annuity (BPA) experience are critical to pension providers, and how Hanover can be instrumental in recruiting these experts.

Why aren’t pension funds investing like insurers?

It's intriguing, and somewhat paradoxical, to see the differing investment approaches between pension funds and insurers. 


Insurers primarily allocate around 55% of their investments to liquid assets and 25-30% in gilts, keeping about 10% in cash. According to the Association of British Insurers, the insurance industry manages investments of about £1.8 trillion, or 25% of the UK’s net worth. The pension fund scene paints a contrasting picture. Here, gilts and equities dominate, with equities alone accounting for 70-80% of investments. 


When these divergent portfolios intersect in a deal, pension funds often miss out on the best value, mainly due to their gilt-heavy composition, while insurers tend to capitalise thanks to their more diversified investment activities. Why?

The importance of having NEDs with BPA insurance experience

I believe that at the heart of this challenge for pension funds is the perceptible knowledge gap. Many pension fund trustees don’t have the knowledge or experience to understand the nuances of the asymmetry in the investment strategies between pensions and insurers. 


This is precisely where a non-executive director who understands BPA is an invaluable asset. 


With someone like this on your board, pension firms can extract higher value from insurer deals, ensuring they manage their investments astutely and ensure appropriate asset allocations. The result is enhanced returns for both the pensioner and the pension provider.


Additionally, as pension funds and insurers increasingly engage in deals, ensuring the stability and success of these transactions is critical. Deals can collapse for a variety of reasons, from unfavourable market fluctuations to unforeseen regulatory changes. NEDs who have BPA expertise can foresee potential pitfalls, advise on risk mitigation and ensure smoother transactions.


Roger Mattingly, Chair of Trustees at the IGG, says: “It is imperative that defined benefit (DB) trustee boards have a good working knowledge of the de-risking options and increasingly the BPA market and the various participant differences. This area of the industry is changing, and that speed of change will only increase, so trustee boards need to make themselves aware (and keep themselves aware) and be open minded to new ideas.” 

Choose Hanover for your NED executive search requirements

Navigating the BPA market and getting the best deals with insurers means pension providers need board members with extensive industry knowledge and a great network of contacts. 


As a Senior Partner specialising in the pensions, investment and life business at Hanover, I have a deep understanding of the BPA market, and I know senior professionals who are ideal for NED roles in this capacity and who can contribute constructively to pension funds. 


If your board is on the lookout for such expertise, contact me directly and let's discuss how I can fulfil your NED search requirements most effectively.

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