UK Private Sector Pensions to Pay More than £300 Billion by 2021

UK consulting firm Mercer forecasts that nearly one-third of £1 trillion will be paid by UK private sector defined benefit pension plans over the next three years due to the large volume of active and deferred members who are expected to transfer the value of their entitlement to another arrangement.

“A third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly,” Andrew Ward, a partner at Mercer, said in a release. “There are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear.”

Mercer said the record payout figure was due to a rapidly growing buy-in and buy-out market, where it said unprecedented premium volumes are expected to be paid to insurers. The firm said the payments will lead to private sector defined benefit plans being better funded and having lower risk profiles. This is because transfer payments for individuals who have yet to retire tend to reduce risk for the pension making the payment, as well as reduce any gap between the value of the plan’s assets, and the cost of buying out and closing the plan.

According to Mercer, the volume of transfer values taken by individual members has increased significantly in recent years. And it said 2018 has been a record year for premiums paid to insurers for buy-ins and buy-outs, with more than £20 billion of defined benefit obligations being insured. The firm forecasts the market to grow again in 2019, and “remain strong for the foreseeable future” with £60 billion of transfer values expect to be paid over the next three years.

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It also said that as the UK defined benefit pension landscape matures, there is potential for an emerging pension consolidator market. But added that how this will impact the amount paid by plans depends on how the new offerings are received by plan sponsors and trustees.

“Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018,” said David Ellis, a partner at Mercer. “Mercer expects the buy-in and buy-out market to smash the record again in 2019 as well-organized schemes take advantage of attractive pricing from insurers.”

Mercer also forecasts defined benefit plans will pay approximately £90 billion in premiums to insurers over the next three years.

Tags: Mercer, Pension, UK

Denmark’s MP Pension said it will exclude from investments 14 countries that it accuses of systematically violating human rights. The move includes divesting DK400 million ($61 million) worth of investments in companies that are controlled by those countries.

“With this approach, we get the financial industry’s most consistent criteria for accountability when it comes to investment in government bonds,” Anders Schelde, investment manager at MP Pension, said in a release. “It’s an area we’ve been working for a long time, but now the time has come to strengthen efforts to promote respect for human rights.”

The 14 countries the pension is excluding from investment are Bahrain, Benin, Burundi, Comoros, Congo, Ethiopia, Iran, Mozambique, Papua New Guinea, Rwanda, Saudi Arabia, Swaziland, Tajikistan, and Thailand.

The pension has fairly strict guidelines on what it can invest in, and excludes companies and countries that have had problems with human rights, labor rights, environment and climate issues, corruption, and controversial weapons. Each quarter the fund scrutinizes the inventory of listed shares, corporate bonds, and government bonds for any possible breach of its policy of responsible investments.

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“As an active owner, our focus is on targeted analysis and dialogue with improvement for purposes, rather than exclusion,” said the company. “If a company violates our policy of responsible investment, we try to influence companies in a positive direction by entering into dialogue and voting at the company’s general meetings.”

The fund added that if its efforts don’t help bring about change from a company, then it will stop the investment and exclude it from its portfolio.

“It’s really not an easy task, but we try to solve it best by being very methodical and basing our decisions on a broad set of information,” said Schelde. “We also place a lot of emphasis on the trend. We would like to support a country that is on way in a positive direction, but instead, we move faster if the level is low and the trend is pointing downwards.”

However, the fund said there are still more countries with human rights issues that it has to stay invested in because of its fiduciary responsibility to its 130,000 members. This includes countries such as China and Russia, which the fund said are difficult to divest from while still maintaining good portfolio management.

“We must accept that large issuers like China and Russia also find space in the portfolio,” said Schelde. “Therefore, we can not invest 100% in line with our accountability standards when it comes to government bonds, because we also need to consider the return. But what we can do is challenge ourselves to invest as responsible as possible—and be open about our dilemmas.”