Pensions: Innovate or die

Following yesterday's RSA Insurance Group deal with Goldman Sachs, it is evident that the pensions buyout market is back. Gone are the lacklustre days in which pension schemes shrank from the high costs associated with such deals: clearly there is money to be made by pensions buyout giants, such as Rothesay Life and Paternoster, and appetite from schemes as well. As Paul Trickett of Watson Wyatt said in today's FT: now that a few large funds have made the move, others are sure to follow.

As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.

Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.

What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.

CMM