Cartwright - Actuarial Consulting and Pensions Administration

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Setting your pension strategy:
Now is the time

A trustee’s ultimate responsibility is to ensure that benefits are paid in full up to and including the final payment to the very last member. The challenge is how to deliver on something that is so far away.

DB schemes are no strangers to long term objectives and strategic advice, but the reality is that few have a coherent long-term strategy that is well designed and implemented effectively. Too often we get bogged down in the detail or ticking boxes to ensure that compliance requirements are met.

After a roller-coaster year and with TPR’s new funding code on the horizon now is very much the time to take a step back and assess what you have in place, what is missing and what you should do for the future. Some schemes have seen significant funding improvements and with insurance markets moving in their favour too, they have been able to secure benefits and accelerate their journey to buy-out. To get into this position requires either good strategy or very good luck.

A good strategy has three core elements:

  • A clearly defined objective
  • A cohesive set of actions to achieve this
  • Regular review and refinement of the strategy to keep things on track

Developing your strategy

  • Objective
    The ultimate objective for most schemes will be buyout and wind up. In cases where the gap to buyout is large, there should be secondary objectives that provide clear staging posts on what could be a long journey.
  • The building blocks
    The available actions, or building blocks, that can be used to reach your objective are broadly the same for all schemes. However, the key is to get the right combination for your scheme and this requires:
    • Open engagement between the trustees, employer and key advisors, and
    • Detailed knowledge of the scheme and a clear understanding of the starting point – the current funding and investment position, scheme maturity, covenant strength and risk appetite. Before looking at how to achieve your objective, it is essential to understand the limits on the employer’s affordability and risk capacity. Only then can you start to build your strategy.

The main building blocks:

  • Time – a longer period provides more opportunity to benefit from asset outperformance and scheme experience. However, more time tends to mean more risk, which must be understood and managed
  • Cash contributions – how much is the employer willing to pay into the scheme, and how secure are those payments likely to be now and into the future?
  • Asset returns – what level of return do we expect - or need - the assets to deliver and how can that be achieved allowing for the risk appetite?
  • Member options – offering non-standard options such as pension increase exchange can improve funding, but there is a cost. What options, if any, should you offer your members?
  • Getting ‘buyout ready’ – resolving data issues, preparing insurer ready data and benefit specifications and, crucially, planning how to approach the market. Recent experience shows that doing this well can lead to savings of up to 10% on buyout costs

A fundamental discussion we have with trustees is the trade-off between risk, returns and time versus cash. The following graphic illustrates two scenarios for a scheme with £100m of assets looking to remove a £50m insurance deficit.



  • Scenario 1 – deficit removed over 20 years through initial cash payments and long-term asset returns, allowing for gradual de-risking, scheme experience and member options.
  • Scenario 2 – deficit removed over 10 years predominantly by increased initial cash payments with reduced returns reflecting immediate de-risking. Here, the impact of scheme experience and member options is reduced due to the shorter period.

    Risk: although scenario 1 leads to a much lower cash cost (£14m vs. £28m), it is essential to consider the risk implications as these determine the extent of reliance on the employer both at outset and over the longer term. Here we can see that the 10 year risk figure is significantly higher under scenario 1 leading to much greater reliance on the employer over the long term.

    This example shows that the range of approaches is wide. Understanding the key factors and limits for your scheme will help you to narrow down the range. It then becomes an iterative process to find the right mix of factors to deliver your long-term strategy.

  • Review and refine
    The third part of strategy is to plan in advance so we know how much variation can be tolerated and what measures will be taken if we move too far off course. One for another blog, but at its core is the need to identify, monitor and manage the key risks to keep your scheme on target to reach its objective.

Despite the challenges of the last year now is, perhaps surprisingly, a good time to assess your current position. Both markets and insurance pricing have improved and you may be much closer to your ultimate objective than you think.

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