Pension Corporation

The Life and Longevity Markets Association (‘LLMA’) announces its launch today.

The LLMA has been formed to promote the development of a liquid traded market in longevity and mortality-related risk, of the type that exists for Insurance Linked Securities (ILS), and other large trend risks like interest rates and inflation. The association will support the development of consistent standards, methodologies and benchmarks to help build a liquid trading market, necessary to support the future demand for longevity protection sought by insurers and pension funds.

The LLMA has been established by AXA, Deutsche Bank, J.P. Morgan, Legal & General, Pension Corporation, Prudential, RBS and Swiss Re.

“In the UK alone the total pension liabilities of all parties exceed £2 trillion. When one considers the size of the worldwide market it becomes clear that all parties would benefit from the development of a liquid traded market in life and longevity risks.”

John Fitzpatrick, a Director of the LLMA said: “The launch of the LLMA brings together a number of parties to create marketwide standards suitable to promote a liquid traded market. Longevity risk is starting to move to pension insurers and reinsurers in significant volumes but much more is likely in the future from pension funds anxious to control their future liabilities. The LLMA’s work will bring benefits to capital markets investors enabling their investment and trading through the growth of a new and uncorrelated asset class. Insurers and reinsurers will benefit by bringing standardised structures to what is today a private, bespoke market. Pension Funds and others with significant financial risk from longevity will benefit from the increased capacity a standardised market will create. Such a marketplace would permit new and flexible solutions for those with longevity and mortality exposures. Increased capacity will also allow pension funds and others to help achieve their objective to secure their members’ benefits for the long term sooner than would otherwise be the case. This development would go a long way to promote a much-needed stability in retirement systems.”

“Increasing numbers of pension funds will seek to stabilise their liabilities through longevity insurance and swaps. As the baby boomers retire and longevity expectations continue to increase across the developed world at historically high rates against largely fixed retirement / entitlement dates demand will rise for ways to protect against this growing financial risk. The development of longevity trading will help to address the future expected demand in the market and allow more and more pension funds to secure their members’ benefits for the future.”

“To date almost all longevity capacity has been provided by the insurance and reinsurance markets. However, given the vast size of global pension liabilities, it is clear that there will be insufficient capacity in these markets to absorb the risks. It is our belief that the capital markets will have an appetite for assets like these that are not correlated with market or credit risks, and hence we have set up the LLMA to facilitate the evolution of the market.”

NOTES: Factfile on the LLMA

Objective
The objective of the Association is to provide a forum for market participants to collaborate with a view to articulating criteria for, and assisting in the establishment of, suitable and consistent standards, conventions and best practices to promote liquidity in the trading of financial instruments that reference longevity and mortality related risks as well as consistency of relevant demographic data

Benefits
Benefits that will be delivered by the Association include improved transparency due to the development of standard indices for longevity, standard financial products linked to longevity and standard methodologies for valuing products.

Scope
The primary focus of the LLMA is pension-related longevity and mortality, rather than life settlements. In the short term the LLMA will be primarily focused on the UK market for longevity and mortality, but may later expand its horizons to other countries.

The focus of the Initiative is exclusively on macro-life related longevity and mortality risk and not on microlife (i.e. Life Settlements)

Participation
Current members of the LLMA are AXA, Deutsche Bank, J.P. Morgan, Legal & General, Pension Corporation, Prudential, RBS and Swiss Re.

The consortium is not a commercial or for-profit venture and it is the intention that any IP developed by the consortium will be made available for use by all market participants

Planned output
The LLMA plans to set standards for the new trading market it wish to promote. These are likely to include:

Templates for standardised longevity products
A longevity trading index
Standardised Valuation model for longevity

Contacts
For more information, please contact
Victoria Sisson, FWD PR
Victoria.sisson@fwdpr.co.uk
020 7623 2368

About the LLMA
The Life and Longevity Markets Association (‘LLMA’) is a non-profit organisation founded and funded by current members: AXA, Deutsche Bank, J.P. Morgan, Legal & General, Pension Corporation, Prudential, RBS and Swiss Re. It aims to promote the development of a liquid traded market in longevity and mortality-related risk. The association supports the development of consistent standards, methodologies and benchmarks to help build a liquid trading market, of the type that exists for Insurance Linked Securities (ILS), and other large trend risks like interest rate and inflation.

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that Pension Insurance Corporation has insured the Inchcape Shipping Services Pension Scheme (“ISS”). ISS is the world’s leading marine services provider.

Pension Insurance Corporation was selected by the trustees on the flexibility of its offering and ability to transact promptly. The pension insurance buyout is for £15 million of liabilities and relates to the entire scheme.

In a little over a year, Pension Insurance Corporation has completed the UK’s largest ever pension insurance buyout (the Thorn £1.1billion pension insurance buyout), the first ever public sector backed transaction with the former DEFRA sponsored body, Food From Britain, and a £500m pension insurance buy-in with the Cadbury Pension Fund, amongst other transactions.

Pension Corporation has achieved a leading market share by offering innovative, tailored solutions which match client requirements. It oversees pension fund liabilities of c.£6 billion and is affiliated to more than 100,000 pension scheme members or former members.

John Horrocks, Chairman of the ISS Trustees, said:

“We are very pleased to have completed this pension insurance buyout with PIC. The ongoing security of our members’ pensions is of the utmost importance to us as Trustees and we believe that PIC will provide that security for the longterm.”

Matt Barnes at Pension Insurance Corporation, commented:

“We are delighted to have been able to help the Trustees of the Inchcape Shipping Services Pension Scheme achieve their goals of securing members’ benefits. In what has been a difficult 12 months for many sponsors and pension schemes alike, we have tailored a number of innovative solutions which match the needs of trustees and scheme members and we look forward to providing further groundbreaking solutions to meet client needs during 2010.”

For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

About Pension Corporation

Pension Corporation assists the trustees and sponsors of defined benefit pension funds in removing risk from pension liabilities. As a market leader it provides risk solutions ranging from full pension insurance buyout to longevity risk insurance and asset-liability management. It offers increased levels of security and stability for members benefits through Pension Insurance Corporation Ltd (“PIC”), an FSA authorised and regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). For further information please visit www.pensioncorporation.com

About Inchcape Shipping Services

Inchcape Shipping Services is the world’s leading marine services provider. Through its proprietary network of some 245 offices employing over 3,800 people across 63 countries, ISS provides its customers with an unparalleled global resource delivered locally and tailored to each customer’s individual needs. Its diversified customer base includes clients across the oil, cruise, container and bulk commodity sectors as well as serving naval, government and inter-governmental clients. Additionally, ISS provides landside commercial and humanitarian logistics, transit, offshore support and other associated marine services. The Company now also provides a growing range of outsourcing services. These include global crew and marine spares logistics; port agency management and commercial representation; and sophisticated Enterprise Resource Planning solutions through its subsidiary ShipNet.

The lack of adequate preparation for the baby boomers and the highest ever level of youth unemployment risk perpetuating the current pensions crisis for at least the next two generations, according to a new paper published by Pension Corporation, which concludes that while the economic crisis and ensuing recession may now be coming to an end, the crisis in pensions continues unabated.

Looking at the impact of the credit crunch and its aftermath on pension provision in the UK, the Study, authored by Dr. Amarendra Swarup and Dr. Frank Eich, is an update of an earlier Study from June 2009. Conducted at the height of the recession, this Study concluded that the crisis had impacted on all aspects of the British pension system and would leave a lasting legacy.

“Back to the drawing board: The economic crisis and its implications for pension provision in the United Kingdom – an update” assesses where the UK pensions system stands at the end of 2009:

The asset price recovery and the improving economic outlook is not mirrored by a recovery in the prospects for the UK pension system
Defined-benefit pension schemes continue to struggle, with only anaemic improvements in their aggregate funding position despite the strong rally in assets over 2009, and are closing down at an increasingly rapid rate
The rise in the value of assets in defined-contribution schemes, whilst welcome, illustrates the volatility and the burden of the future risk placed on the individual
Alongside the consequences of the current crisis, society also has to prepare for the economic and fiscal consequences of population ageing, married to the retirement of the baby boomers
With youth unemployment rising to its highest ever, there is the risk that an entire cohort could start their working lives with a broken employment record, making it difficult for them to build up adequate pension entitlements or other forms of long-term savings
With little evidence of individuals planning for retirement, the likelihood remains that a large percentage of future pensioners will be disappointed by their retirement income
Meanwhile, the public finance outlook remains bleak and the future fiscal tightening required will depress disposable income growth for years to come and leave the government in a weak position to deal with the above challenges

Pension Corporation is committed to helping facilitate a debate around pensions, through its own published studies and research, sponsorship of other reports, the Pensions Tomorrow initiative at the London School of Economics and other projects.

The Trustees of the Cadbury Pension Fund have agreed a pension insurance buy-in agreement, to insure a part of their pensioner liabilities with Pension Insurance Corporation (“PIC”). The liabilities being insured are valued at approximately £500m. The insurance policy will be held as an asset of the Cadbury Pension Fund, matching a proportion of the Fund’s liabilities. This investment is part of the Fund's ongoing programme of reducing risk in the pension fund.

John Coomber, Chief Executive of Pension Insurance Corporation, commented:

“We have been working with the Trustees for over a year in order to meet their requirements with the most appropriate transaction for the Fund. We are very pleased to have been able to help the Trustees achieve this important step in securing pensioner benefits.”

Aon Consulting acted for the Fund in the placement of this insurance.

For further information please contact:

David Skapinker
T: 020 7505 7478
M: 0750 553 6436
david.skapinker@aon.co.uk

Notes to Editors

Pension insurance buy-in
A pension insurance buy-in is an investment by the trustee of a pension plan in a bulk annuity policy provided by an insurer. The bulk annuity relates to specified pensioner members of the plan, and will pay the plan the agreed level of benefits for the lifetime of these members (and potentially that of their dependants). This means that the asset generally matches the plan’s obligation to these members, so removes investment, inflation and longevity risks from the plan in relation to the specified members. Because the policy is held in the name of the plan, however, the trustee retains responsibility for the payments made to members, and typically needs to ensure that there is no preferential treatment as a result of the buy-in in relation to those members specified under the policy.

About Aon Consulting
Aon Consulting Worldwide is among the top global human capital consulting firms, with 2008 revenues of $1.358 billion and more than 6,300 professionals in 117 offices worldwide. Aon Consulting works with organisations to improve business performance and shape the workplace of the future through employee benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007 and 2008. For more information on Aon, please visit www.aon.mediaroom.com.

About Aon
Aon Corporation (NYSE: AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting. Through its more than 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon's industry-leading global resources and technical expertise are delivered locally through more than 500 offices in more than 120 countries. Named the world's best broker by Euromoney magazine's 2008 and 2009 Insurance Survey, Aon also ranked highest on Business Insurance's listing of the world's largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on brokerage revenues in 2007, 2008, and 2009, and Aon was voted best insurance intermediary, best reinsurance intermediary and best employee benefits consulting firm in 2007, 2008 and 2009 by the readers of Business Insurance. For more information on Aon, log on to http://www.aon.com.

http://aon.mediaroom.com/index.php?s=58.

Safe Harbour Statement: http://aon.mediaroom.com/index.php?s=67

Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Pension Corporation
Pension Corporation removes pension risks from the trustees and sponsors of defined benefit pension funds. As a market leader it provides risk solutions ranging from full pension insurance buyout to longevity risk insurance, sponsor stewardship and asset-liability management. The Group provides increased levels of security and stability for members benefits through Pension Insurance Corporation Ltd (“PIC”), an FSA authorised and regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). For further information please visit www.pensioncorporation.com.

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, expects that the final three months of 2009 will be the busiest for pension insurance buyout and buy-ins since Q3 2008, when there was approximately £2 billion of risk transferred.

Pension Corporation’s latest Pension Risk Transfer Index, published today, shows that overall affordability for pension insurance is at its most favourable level since September 2008. Sponsors and trustees are anxious to de-risk their pension funds post the Lehman bankruptcy; and in addition, as credit spreads continue to come in, those schemes invested in gilts and corporate bonds have an impetus to transact as the cost of delay becomes relatively more expensive for them.

High levels of uncertainty around the markets and the economy are leading Trustees to seek to increase the speed of a risk transfer transaction. This trend is being driven by concerns that scheme assets will again reduce in value if there is a second wave of asset price falls; also around future economic policy, including the phasing of quantitative easing and consequential levels of inflation; and the weakening of the corporate covenant should insolvency rates increase.

As well as quicker transaction processes, Trustees are increasingly seeking innovative risk transfer solutions, rather than a straight focus on price, as concerns over market volatility mount. This has manifested itself in Trustees increasingly requesting the immediate transfer of investment risk to the insurer upon signing of exclusivity, rather than on signing of the detailed policy documents.

David Collinson, Partner at Pension Corporation, commented:

“Several key factors in the market are helping to drive sponsors and trustees to offload as much risk as they are able to afford during this quarter. Perhaps the most significant of these is that the overall affordability for schemes is at its most favorable since September 2008, just before Lehman collapsed.

“However, it should be noted that Trustees, whilst keenly interested in price, are now considering other factors when they wish to transact. One of the key innovations which we are increasingly being asked to provide is the immediate transfer of investment risk during the period of exclusivity before contracts are signed.”

Notes to Editors:

For further information please contact:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that the Trustee of three Denso Manufacturing Midlands Ltd pension schemes has agreed a pension insurance buyout with Pension Insurance Corporation (“PIC”). The Trustee purchased a bulk annuity contract from PIC, which covers pensioners and deferred members with total liabilities valued in excess of £100m.

The pension insurance buyout of the schemes concludes the company’s initiative in bringing increased levels of safety and security to member benefits.

Denso is a leading global supplier of advanced automotive technologies, systems and components.

PIC was chosen by Denso and Capita Pension Trustees Limited, as Trustee, after a comprehensive and competitive process. Denso was advised by KPMG and Baker & McKenzie, with Capita being advised by Mercer and Hammonds.

John Coomber, Chief Executive Officer, Pension Insurance Corporation, said:

“We are delighted to have concluded this transaction with Denso, a company which has a well founded reputation for looking after its employees. The increased levels of security brought to member benefits through this pension insurance buyout reflect this stance. This was an ‘all risks’ transfer allowing the company an immediate and complete discharge from the schemes, in contrast with the usual insurance process which can often take more than a year to conclude. To accelerate this risk transfer, Pension Corporation became the sponsor to the schemes at the same time as the PIC insurance policy was purchased. This presented a number of challenges which we have successfully addressed. We believe that this will be the first of several transactions with large multinational organisations.”

Rosemary Kennell, Director of Capita Pension Trustees Limited, as Trustee to the schemes, said:

“This transaction with Pension Insurance Corporation is another ground breaking all risks transaction that Capita have been involved in as a professional trustee and means that members now have increased levels of security for their benefits. It adds to our experience of other complex and international pensions cases, which we have managed pro-actively and efficiently.”

Wayne Segers, Director at KPMG, as advisor to Denso, said:

“KPMG is delighted to have led on this transaction and to have worked with Pension Insurance Corporation to design and implement the best solution for our client, whilst also securing member benefits for the long term. The Pension Insurance Corporation team was responsive and flexible to the requirements of sponsor and Trustee. This transaction builds on our significant experience in advising Japanese companies on UK pension matters.”

Stuart Faloon, Principal at Mercer, as adviser to the Trustee, said:

“This is the latest in a series of transactions where Mercer has advised trustees on bulk annuity solutions in conjunction with its sister companies, Oliver Wyman and Marsh. Due to the schemes' complex benefit structures and the requirement to facilitate a quick transaction, this deal with Pension Insurance Corporation required experienced personnel with the ability to negotiate robustly whilst maintaining a strong focus on completing the right deal for all parties.”

Notes to Editors:

For further information please contact:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Pension Corporation removes pension risks from the trustees and sponsors of defined benefit pension funds. As a market leader it provides risk solutions ranging from full pension insurance buyout to longevity risk insurance, sponsor stewardship and asset-liability management. The Group provides increased levels of security and stability for members benefits through Pension Insurance Corporation Ltd (“PIC”), an FSA authorised and regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). For further information please visit www.pensioncorporation.com

Pension Corporation LLP is a limited liability partnership registered in England under registration number OC316968. Our insurance solutions are provided through Pension Insurance Corporation Ltd, registered in England under registration number 05706720, which is authorised and regulated by the Financial Services Authority (FSA FRN 454345). Both Registered offices are at 14 Cornhill, London EC3V 3ND.

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that it has made a number of appointments across the business to bolster its team.

Laura Upton and Tim Edwards have been appointed senior transition managers within the operations team; Marco Diolosa and John Sladden have joined the Asset-Liability Management team; Richard Purcell joins Pension Corporation as actuary within the finance team; and Ben Tregoning joins as business development executive working across Pension Corporation Investments and Pension Insurance Corporation to analyse specific transactions.

Ben Tregoning, John Sladden, Laura Upton and Tim Edwards join Pension Corporation from Paternoster. Richard Purcell joins from Watson Wyatt and Marco Diolosa from Russell Investments.

Kim Gozzett, Partnership Director, Pension Corporation, said:

"I am delighted that we have been able to appoint so many outstanding candidates. Pension Corporation has an increasingly busy pipeline of transactions and it is important that we have the people to ensure that they run smoothly. These appointments, combined with our existing team, will ensure we maintain a first class level of service for trustees and corporate sponsors."

Enquiries:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Pension Corporation removes pension risks from the trustees and sponsors of defined benefit pension funds. As a market leader it is the counterparty to risks ranging from full pension insurance buyout to longevity risk insurance, sponsor stewardship and asset-liability management. Established in 2006 by the Truell Charitable Foundation, the Group now provides increased levels of security and stability for fund members through Pension Insurance Corporation Ltd (“PIC”), an FSA authorised and regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). For further information please visit www.pensioncorporation.com

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that Pension Insurance Corporation (“PIC”) is to insure the remainder of the Thomson Regional Newspapers (“TRN”) Pension Fund, a pension scheme sponsored by Citigroup (“Citi”).

The TRN Trustee directors purchased a bulk annuity contract from PIC, the FSA authorised and regulated insurance arm of Pension Corporation. The policy covers primarily the deferred members of the scheme with liabilities valued at approximately £35m.

The insurance policy will be held as an asset by the TRN Pension Fund. The Trustee Directors will continue to be responsible for paying benefits to the Fund's members.

Steve Balmont of Law Debenture, Chairman of the TRN Trustee body said: "We are pleased to have worked together with Pension Insurance Corporation, Citi and our advisors to purchase a further insurance policy that puts the Fund members' benefits on an even more secure footing."

Jay Shah, co-head of origination, Pension Corporation, said:

"We worked closely with the Trustee directors, their advisers and Citi to achieve their immediate objectives of providing a tailored insurance solution. This deal follows on from several other innovative insurance solutions provided by Pension Corporation to pension schemes in recent months."

Francis Fernandes, Citi, said:

"We are delighted to have helped structure this deal. Under Citi's sponsorship and also now the PIC insurance solution, the TRN Fund enjoys a level of security to which most other UK pension schemes can only aspire. We believe TRN is a great example of how pension scheme risk-management should operate in practice."

Enquiries:

For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that the Trustee of Walthamstow Stadium Limited Retirement Benefits Scheme has accepted a proposal to insure its benefits with Pension Insurance Corporation (“PIC”). The pension scheme has assets of £19 million.

Following the closure of the business, based around the former greyhound racecourse in East London, the pension scheme was closed to future accrual. The Trustee ran a competitive process which included several other pension insurance companies.

The Trustee concluded that the safety and security of member benefits would be secured through a full pension insurance buyout transacted with Pension Insurance Corporation. The Trustee was impressed with Pension Corporation’s business approach and willingness to do business on competitive terms.

Matt Barnes, Partner, Pension Corporation, commented:

“I am delighted that we were able to help the Trustee of the Walthamstow Stadium scheme arrive at a successful conclusion in securing their member benefits for the long term. We look forward to helping more trustees and sponsors transfer pension risk as the market continues to grow during the second half of 2009.”

Notes to Editors:

For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Pension Corporation removes pension risks from the sponsors and trustees of defined benefit pension schemes. As a market leader it is the counterparty to risks ranging from full buyout to longevity risk insurance, scheme stewardship and asset-liability management. It provides increased levels of security and stability for scheme members through Pension Insurance Corporation Ltd (“PIC”), a fully authorized and FSA-regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). Pension Corporation is backed by a range of financial services firms including J.C. Flowers, Royal Bank of Scotland, Swiss Re and JP Morgan. For further information please visit www.pensioncorporation.com

The term “systemic risk” is normally used to describe the risk that idiosyncratic shocks affecting individual businesses could be transmitted throughout the financial market, with the result that the whole market could become unstable or even collapse. As the world economy has become ever more integrated, this risk has gradually increased over time but until recently appeared to be more a theoretical phenomenon than a real issue. Over the last year we have all seen how serious this risk is in the real world, with the collapse of Lehman Brothers nearly bringing the whole global financial system to its knees and pulling the world economy into recession.

Taking a slightly more liberal definition of “systemic risk” there are many other areas in which adverse developments in one part of the market could affect other parts, with the result that the overall structure could become unsustainable over time.

One such area is pensions; as it is the British pension system provides a particularly good example. The system is based on a highly complex structure, with the different players – individuals, firms and government – interlinked in myriad explicit and implicit ways. State pensions (with a large means-testing element but also an earnings-related component), occupational pensions (defined benefit but increasingly defined contribution based) and private pen sions (to be boosted by personal accounts in 2012) are all meant to work together to avoid pensioner poverty and enable pensioners to enjoy a quality of life similar to that prior to retirement. The issue becomes even more compli cated once the housing market, which provides an impor tant mechanism for building up assets to fund consumption in retirement, is brought into the equation. Government, quangos such as The Pensions Regulator or the Personal Accounts Delivery Authority, corporate sponsors and pen sion fund trustees, independent financial advisers and last but not least the individual (hopefully entirely rational, for ward looking and financially literate) all play pivotal roles to keep the pension system alive.

A failure of one part of the system to deliver what it is meant to deliver could jeopardise the smooth functioning of other parts of the system, making the entire structure eventually unsustainable. The key difference between the “systemic” risk in the British pension system and the financial markets is perhaps the time span over which the problems materialise and become apparent. In the case of pensions the developments are driven to a large extent by slow-moving demographic change so the collapse will resemble more a slow decline than a rapid wildfire. While the seriousness of the issue is perhaps similar, the slow col lapse at least gives plenty of time to act. Unfortunately, as we have seen again and again, it also gives plenty of time to procrastinate.

Looking back
So, what is wrong with the British pension system? To answer this question one has to go back at least 10 years. Up to the late 1990s the British pension system was charac terised by modest state provision aimed at alleviating pen sioner poverty and solid occupational pensions for those on medium or higher incomes, with defined benefit pension schemes widespread in the public and private sectors. Back then, around 60% of all pension incomes came from the state, the remainder from the private sector.

Since the beginning of the new century this tried and tested model has come under increasing strain, with corpo rate sponsors of defined benefit pension schemes waking up to the true costs of the promises made and increasingly struggling to make the required contributions to meet the government’s funding requirements for these schemes. Many corporate sponsors concluded that the only way for ward was to close their existing DB schemes and shift the risks associated with pension provision to the individual by offering defined contribution schemes instead.

Meanwhile, the government focused increasingly on targeting state pensions on those in greatest need by introducing first the minimum income guarantee and later the pension credit to keep state pension spending at a minimum. In an acknowledgement that not everything was rosy though, in 2002 the government established the Pensions Commission to develop ideas on how to help those on moderate earnings save for retirement while keeping the public finances sustainable. The Pensions Commission sug gested three major policy reforms, which the government more or less implemented as new policy: linking the basic state pension to earnings growth rather than inflation from 2012 onwards, increasing the state pension age from 65 years in 2010 to 68 years by the mid-2040s as a response to the projected increase in longevity and the establishment of personal accounts as a private savings vehicle for those on moderate incomes also by 2012.

This brief history of recent pension developments in the UK illustrates that the system was far from stable before the financial and economic crisis unfolded. The crisis has set in motion further developments as it has had an adverse impact on all aspects of the pension landscape.

The first development is the further decline of DB pensions in the UK – a trend that was not inevitable as a number of larger scale employers in the private sector appeared to remain committed to these schemes pre crisis. In June alone, BP, Morrisons and Barclays all announced the closure of their schemes either to new members or to future accruals, with the result that DB pensions have become exclusive to public sector workers. This means that most private sector workers have to deal with all the risks associated with pension provision – longevity, inflation, investment – on their own. In theory the crisis could also stress test the viability of the Pension Protection Fund, which was set up under the provisions of the Pensions Act 2004 to help members of DB pension schemes whose corporate sponsors have run into financial difficulties. Second, those in defined contribution pension schemes have also done badly, with the stock market offering dis appointing returns over the last 10 years and more. This leaves those close to retirement or contemplating buying an annuity with lower pension wealth than previously expected and perhaps looking for the government to make up any shortfall.

Retirement income
With businesses disowning – perhaps rightly in a changing world in which jobs-for-life no longer exist – their respon sibility to provide a guaranteed retirement income to their employees and individuals badly placed to deal with the risks they increasingly face, the role of government in ensuring reasonable incomes in retirement might have to be revisited. But the shock that has impacted on DB and DC schemes has also affected the government’s ability to help out. The economic crisis has been a major blow to the public finances in the UK, with the government now running one of the largest public deficits anywhere in the developed world. This leaves the government in a weak position to meet any potential demands from those on disappointing DB or DC pensions for higher state spending to fill the gap and could jeopardise the recent policy reforms before they have even been launched.

In other words, the continued closure of DB schemes and weak performance of DC schemes could stretch the govern ment’s ability to meet its own side of the pensions bargain, representing its very own kind of “systemic risk”. If this were indeed to happen then nothing but a complete rebuild of the UK pension system would suffice to put pensions on a sound footing in the first half of this century.