However, some of the articles have been a little one-sided, focussing almost entirely on the asset side of pension schemes and completely ignoring the liability side. The LDI crisis, first and foremost, is not a funding issue for DB schemes. In fact, and more below, DB schemes are better funded than ever. It is and continues to be a liquidity issue, schemes are struggling to liquidate assets to meet collateral calls. I am not trying to over trivialise this though, it starts as a liquidity issue but if a scheme can’t post collateral that can lead to their hedges being reduced, real losses and funding impacts could become a reality. I have no doubt lessons will have to be learnt from the next few weeks.

Insurers on the other hand have seen relative calm, though I have no doubt that the investment teams within insurers have been busy. Insurers use LDI strategies, but, and this is why an insurance buyout is the gold standard in security and the aim for most DB schemes, insurers understand and do manage the risks robustly around their assets and liabilities. Insurers weren’t using material amounts, if any, of “geared” LDI (this is the type of investment that really got messy in the last few weeks and is where schemes use only a proportion of their assets to protect the whole liability against interest rate movements, so effectively leveraging themselves), and they keep a very close eye on liquidity and can meet potential collateral calls in much more extreme conditions than seen last week. In fact, for the insurers that we’ve spoken to and analysed in the past two weeks their solvency position (i.e the excess of assets above their liabilities) has actually improved – so they’re in a stronger position!

With all this noise on LDI and pension scheme impending doom a really important point isn’t getting the attention it deserves, and that is that most schemes funding positions have been improving materially.  By our analysis hundreds of schemes are now fully funded to an insurance buyout. They are in a fantastic position. Happy days…. Or not? There have been some voices in the industry now encouraging schemes to take their time on buyout……to consider other options…

If I were a cynical man, I might say that there may be a sudden reticence to see too many schemes move to buy out too quickly as it cuts off future earning potential. Fortunately, I’m not a cynical man. And Sponsors aren’t silly.

The graph below shows our own analysis of absolute buyout pricing.

We can see buyout pricing down 13% over September, 21% over the last two months and down 38% since the start of the year. Many small schemes we see (<£50m) have limited hedging so they may very well have seen these sorts of improvements in their buyout funding position.

Blast!!  I hear you cry, I can’t buyout because I’m too small, so insurers won’t be interested, I have lot of deferred members which insurers don’t like, and I have got to deal with the ridiculousness of GMP equalisation. Its not going to be an option for me.

But there’s where you’d be wrong.

If you are being told any of those things are a blocker to insurance, then you are not getting the right information. In the last three weeks alone, we have completed three small full buyout transactions. They were £1.6m, £6.5m and £11m in size, two had GMP equalisation to deal with and two had material (in one case >75%) of their liabilities in deferred members. 

What’s better, small schemes using our K3 Engage approach, which is simply about being prepared, are trading quicker than any larger scheme could hope to do. In the current volatile market, being able to move quickly and seize an opportunity with an insurer is so powerful. By way of example, the £1.6m and £6.5m cases received quotations within three weeks of approaching the insurance market and then signed the contract within a week of receiving it. That’s roughly a month, beginning to end. 

Trustees and sponsors, I implore you to make sure you’re up to date on the buyout position of your schemes. Waiting weeks for your actuary to guess at an insurance number is pretty much pointless, and in less time, and most likely at less cost, there are ways for you to source live pricing from the insurance market, which then enables you to transact quickly to capture the opportunity. Don’t hesitate, get ready!