The introduction of pension scheme values onto balance sheets has caused many
a headache among finance directors. The only winners from stock market
volatility and rising mortality rates seem to be HR consultancies, keen to
provide updates on stock market pension deficits on an almost hourly basis.
So imagine a scenario where, rather than just simply ending a defined
benefit pension scheme, a company could offload all liability, associated risks
What was once a dream is now very real. Paternoster is the first of a number
of insurance firms looking to take your closed DB scheme off your hands. –
completely. The firm buys companies’ closed DB schemes, then looks after the
scheme members, paying out annuities when appropriate.
Formed just 18 months ago by former Prudential chief and qualified
accountant Mark Wood, along with £500m worth of investment mainly from Deutsche
Bank and Eton Park International, the firm now represents 21 clients with
£335.51m of assets under management.
One of Wood’s first appointments was FD Andy Smith, another former ‘man from
‘We were created in December 2005, then went quickly from fundraising to all
systems go from June 2006,’ explains Smith.
The business was set up as a result of changes in the regulatory environment
that allowed selling of closed pension schemes of existing businesses, and to
take advantage of adverse reaction to reporting for pensions.
A similar business model already existed for passing on schemes of insolvent
businesses, which was operated through a duopoly of the Prudential and Legal
& General, Smith explains.
‘It was [an existing] market with attractive returns and there was growth
opportunity, and that’s the background of why our investors were prepared to
put money behind us.’
Too good to be true
The business model sounds almost too good to be true. Surely FDs, directors
and trustees must be concerned that they would retain some responsibility for
the scheme’s performance?
Smith explains that Paternoster provides a ‘full buyout’ of the scheme,
‘which means that the employer is absolved of responsibility’.
But companies can also choose to retain some control of the scheme if they
want. For example Paternoster can underwrite a client’s risk to shifting
mortality rates, leaving the client and its trustees to deal with pension
scheme investment decisions.
Pension deficits have shrunk in the current benign economy to as little as
£3bn, according to a recent survey by Société Générale Asset Management, which
some would consider as limiting Paternoster’s ability to persuade companies to
offload their schemes.
Smith disagrees that this will curb the market he’s in, because Paternoster
is targeting schemes valued between £10m and £1bn. Those operating a scheme
with a shrinking deficit may decide they’re fed up of being ‘a gambler that’s
had to gamble’, and can exit its liability in a good position.
‘It means people can afford to buy out, which is a bit like being an
addicted gambler in so much as how addicted are you to playing the tables?’
Others with more ‘problematic deficits’ can exit once and for all, suggests
Smith. It’s more beneficial to some than others, such as smaller businesses
which will always face relatively high administrative costs of running schemes.
‘Small companies can’t get the economies of scale, and the cost of [hiring]
expertise can be disproportionately high for them,’ Smith says.
Paternoster operates in an environment where investors have never been so
involved. Nevertheless, Smith doesn’t anticipate any bad publicity ahead
created by investors who might be unhappy that their company no longer manages
its own pension scheme. In fact he expects the reverse.
‘As a rule I’d expect investors to see us favourably. What we’re doing is
allowing a business to focus on being a business rather than worrying about the
pension scheme, which is a distraction.
‘Why would a business that makes widgets want to spend much of its
management time focused on the volatility of its pension scheme for people who
have left the business? It seems nonsense for a management team to do that.
We’ve created an opportunity to once and for all remove that from their
concerns and get on and make widgets more efficiently.’
Smith finds himself in a 100-strong company comprised mostly of number
crunchers, be they actuaries or accountants. That might be uncomfortable or
intimidating for some FDs, but Smith revels in his position for a number of
‘On first arriving it was about creating an operation. There was nothing
there and one of the reasons I joined was to have a big influence on the
organisation and get what you want out of finance.’
The firm’s actuarial team consists of nearly 50 staff, mostly based in India
, while eight work in finance – six of whom are also abroad. The company’s
decision to employ finance and actuarial staff in India doesn’t undermine the
UK’s position as a knowledge economy, says Smith. Understanding the subtleties
of regulation and law requires local ‘UK’ knowledge but for Paternoster,
recruiting staff of such a high standard in a short space of time in the UK was
‘All the true innovation is much more likely to come out of the UK.’
Smith also accepted the FD role to move away from the insularity of just
looking after finance. His last role at the Pru, where he headed up the firm’s
pension business, helped prepare him.
‘I was given profit and loss responsibilities for that part of the business,
which predominantly appealed to me instead of reporting a set of numbers. I was
then held accountable for them when dragged in front of the CEO, to explain
what they were on a monthly basis.
‘Within finance you often find, in particular as a financial controller,
that it’s very internally focused and you’re just trying to make your function
operate as efficiently as possible and provide information that the business
Smith was responsible for product development at the Pru during the run-up
to A-Day, the massive reform that set out to encourage pension investment.
He sees the initiative as ironic for the fact that pensions regulation
creates opportunities for insurers to innovate, while in his role as an FD,
accounting and reporting regulation often has little benefit for investors or
the business, but rather adds cost.
‘Because pensions are so heavily regulated, opportunities come along as
innovation is forced upon the industry through regulatory change. In terms of
financial reporting and accounting, if it doesn’t offer a greater insight, of
which a lot of it doesn’t, then it’s just an expensive overhead.’
While many consider the insurance market dull, its intellectual and
technical challenges fascinate Smith, and give him the opportunity to work with
those he considers the most intelligent people. ‘The insurance industry is full
of very bright people. Accountants and actuaries dominate its thinking,’ says
He now hopes to meet similarly bright people at HR employee benefits
consultancies and trustee groups, or at least those who think the firm’s
business model works.
‘I’ll be working with them over the next few months to do presentations and
explain what we do.
‘From what I can see this business looks like it’ll be pretty successful,
that’ll give me a role for the next five years I think.’
He may well have FDs as friends for life if the model of offloading pension
schemes is as good as it sounds.
New kid on the block attitude
Paternoster, which buys out pension schemes, relies on its accountants and
actuaries to do the real grunt work behind the scenes. So when the business was
just months old it could not have received a more ringing endorsement of its
offering than to win a 30 year-old chartered accountants pension scheme.
In December 2006 the trustee of the Chartered Accountants Superannuation
Scheme agreed to transfer the pensions, of which there were 962 pensioners and
323 deferred members, to Paternoster. The scheme had been set up in 1978 for
firms of chartered accountants and their employees.
Former ICAEW president and chairman of the corporate trustee of CAESS, Roger
Lawson, lauded the Paternoster’s ‘new kid on the block’ attitude: ‘They’re the
AVIS of the insurance industry: “We try harder”,’ says Lawson.
CAESS put out a tender, and were impressed by Paternoster’s responsive
attitude to their issues and concerns over selling the scheme.
‘They’re particularly good if beneficiaries come out of the woodwork, so the
contingent liability wouldn’t come back to haunt us. Our primary concern has
been to ensure long term security for our scheme members and we agreed that
transferring to an insurance company was the best way to manage this.
The scheme was the tenth deal Paternoster had undertaken, which has now risen
to 21. Recent deals include the trustees of the Seddon Atkinson (a member of the
Fiat Group) and the foreign currency division of the Texaco Overseas Tankship
‘We’re now paying over £1m of annuities a month to pensioners,’ says
Paternoster FD Andy Smith.
‘Trustees stay on risk until the windup of the scheme. Their primary concern
is that their pensioners are getting the best deal and best service they can
afford for them. Effectively the scheme is wound up and the individual
policyholder moves and we’re accountable for them, up until that point we’re
dealing with the trustees.’
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