When it comes to choosing a cost effective de-risking strategy, mid-sized schemes often have to overcome challenges to achieve their objectives, as Peter Askins explains
What’s your experience of mid-sized schemes implementing de-risking strategies?
Most of these schemes are closed to future accrual, so are somewhere on the path towards buyout or winding the scheme up. That tends to be the driver for de-risking, both in terms of investment strategy – so looking to lock in any gains from growth assets – but more commonly, looking at reducing liabilities.
Just how realistic do you think buyouts are for schemes?
It is only larger schemes that have the scope and employer backing where they can see it’s sensible to put additional funds in to enable them to remove the risk that the scheme presents to the business.
…if you want to reduce your deficit, you have to attack liabilities in whatever way is appropriate.
You can’t invest your way out of a deficit. You want good returns that can contribute, and you want sponsor commitment in terms of what they are going to pay. But if you want to reduce your deficit, you have to attack liabilities in whatever way is appropriate.
Increasingly, sponsors are looking in the direction of liability reduction. This is an attempt to manage down the size of their schemes to a position where they may be able to look towards winding the scheme up. Most will look towards trivial commutation and, given the new pensions freedoms, that members will want to exercise their right to a transfer. Failing that, there is an increasing recognition that enhancing transfers is less costly than securing benefits with an insurer and therefore one way of reducing liabilities.
There are no easy options for these schemes and sponsors face an everyday struggle to balance the needs of the scheme and the employer. But generally, you look at what you can do about the liabilities, then you look at the possible de-risking, then you can map out what your expectations are over self-suffciency, or actually getting to the tipping point where it becomes a good business decision, even for smaller schemes.
Where do you see the market heading?
Given that there are thousands of small defined benefit schemes still out there, mostly closed to future accrual, at some point markets will wake up to the fact that they are there. If you look at any reports of any issues in the press, it’s all big schemes – that’s where the money is, so that’s where the interest is.
All our sponsors are looking for is help. Help to get to a point where they don’t need to put any more money in, and then help to get the risk off their balance sheets. As professional trustees though, protecting the beneficiaries’ interest is paramount.
But for the most part, we are helping companies to stay afloat, so by managing their liabilities and commitments in a way that doesn’t impede company growth, hopefully over time we can lead them to a conclusion.
Ultimately, five out of six DB schemes are closed to future accrual, so there are only really two end results. Either the scheme winds up with an insurer, or it winds up in the Pension Protection Fund.
From a beneficiaries’ interest point of view, I’d much rather it went to an insurer, because that at least means the members are guaranteed default benefits and they’ve the full protections that back up insurance company funding. If the company rolls over they go into the PPF and members suffer a loss.
“I do all I can to help employers get to a point where the scheme can move into an insured arrangement, because that ensures the beneficiaries interest is protected.