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.
