1. How do I reduce the risk to the company of the pension scheme?
Despite significant deficit contributions over the past decade, the funding position for the majority of schemes hasn’t improved. It’s important to have a long term plan for the Scheme, which would typically have the aim of completely taking the risk off the balance sheet by winding up the Scheme and buying out the benefits with an insurance company. Most schemes are a way off this, but planning can start now. An alternative target is to fund towards scheme self-sufficiency, where there’s a high chance of meeting the cost of member benefits, without going back to the sponsor for more contributions.
The first lever, is putting in place some form of dynamic de-risking plan. When funding targets are reached, assets are moved from riskier to liability matched assets.
A second cornerstone to reducing the funding gap is ensuring that an adequate level of contributions goes into the Scheme, combined with an appropriate investment strategy. A gradual move to a less risky investment strategy, using bonds and/or LDI can reduce risk over time, as can periodic buy ins of sections of scheme liabilities.
Diversification of growth assets is also important.
Thirdly, member de-risking exercises such as pension increase exchange exercises, trivial commutation exercises and transfer value exercises can help to reduce the size of the liabilities.
2. Should I undertake a member de-risking exercise?
It’s important to take professional advice if you plan to undertake an exercise and to work with the Scheme trustees. Additional member de-risking exercises, such as winding up lump sum exercises, can take place when a scheme is being wound up. An example of this could be the wind up of an existing pension scheme, where the assets and liabilities are being transferred to a new scheme arrangement, or in a merger/acquisition process.
3. What charges are the scheme and sponsor incurring?
It can be difficult to get information, but it’s important to understand how much is being paid for services such as administration, investment (consultancy and fund management charges), governance, legal, audit, actuarial and covenant. Value for money, not just cost, is also an important consideration.
4. Are you comfortable with current governance arrangements?
As schemes become legacy arrangements and as legislation pressures have increased over time, it’s hard for schemes to find trustees. Co-ordinating an increasingly complex array of fragmented service providers can be challenging. Alternative approaches may provide better value for money and make life easier, include moving to a one stop shop approach for pension provision.
An example of the latter approach is the DB Complete product that we offer, an example of a DB Master Trust, where each scheme’s assets and liabilities are segregated. This solution provides all of the services required to run an occupational pension scheme, including administration, investment, trusteeship, covenant, actuarial and legal. This allows the sponsor to run their business, safe in the knowledge their scheme is being well managed, in a cost effective manner.