Morecambe & Wise’s 1971 Christmas Show included one of their most famous sketches and best known punchlines. The sketch featured the principal conductor of the London Symphony Orchestra, André Previn. In the sketch, with some persuasion, Previn agreed to conduct an orchestra for a rendition of Grieg’s Piano Concerto in A minor, with Eric Morecambe taking the piano solo. After missing Previn’s cue at the first two attempts, Eric began on time but played a quirky little tune that didn’t bear any resemblance to Grieg’s Concerto. This led to an exacerbated Previn confronting him, saying he was playing “all the wrong notes”. Eric Morecambe grabbed Previn, and responded “I’m playing all the right notes – but not necessarily in the right order”.

Was this famous sketch a prophecy for UK pension risk management in 2014? Perhaps not, but it makes a simple point about following a plan; knowing which notes to play is one thing, but playing them in the right order is what really counts. This principle is equally applicable to the range of options available to pension scheme sponsors and trustees to help manage risks in their schemes. Possible options cover plan design, investment strategy, insurance solutions and liability management (or ‘member choice’) exercises. Which actions should be carried out, and in what order? How can the ‘notes’ be arranged to play the right tune?

Below are some examples of how to get the notes in the right order for pension risk management:

● Many scheme sponsors and trustees are now looking to implement a retirement transfer option, where retiring members are given the choice to transfer from their defined benefit scheme and purchase their preferred type of retirement income via the open market. Members doing this remove risk from the scheme, but the option is only available when members retire; so make sure to do this while your scheme still has a significant non-pensioner population.

● If over the next year you plan to secure benefits with an insurer via a buy-in, then act now to improve the data on the existence and age of spouses. The insurance premium should be lower where more certainty over the benefits being insured can be demonstrated, saving you money on the deal.

● Address tracing should be carried out ahead of any attempts to run a pension increase exchange exercise, as members will only be able to receive the offer if they can be contacted.

The right order in which to implement actions will depend on what position the scheme is in now, what the scheme sponsor and trustees are looking to achieve, and over what timeframe. What tune do you want to play?

A framework can be put in place to allow a scheme to consider the different ways to manage risks and form a prioritised action plan. Developing such a framework has proved successful for a growing number of pension schemes in the UK, and has been well received by sponsors and trustees alike. Proactive management of risk in an effective, prioritised way is of benefit to both these groups. Clearly identifying ‘quick wins’ and the actions that have the most impact against the agreed objectives, targets or measures, means the correct arrangement of planned actions can be plotted.

Most pension scheme trustees and sponsors will agree in principle that reducing risks within the scheme is desirable and most will have an awareness of some of the options that are available to help manage risk. But the list of potential actions is long, including closure to entrants or accrual, buy-ins, longevity swaps, liability driven investment (LDI), investment hedging, enhanced transfer value exercises and early retirement exercises to name but a few. With a structured, prioritised plan based on consistent criteria in place, schemes will have a musical score to follow, ensuring they not only know the right notes, but also know the right order in which to play them.

Stewart Patterson is senior consultant, Towers Watson

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