Turn de-risking dreams into reality

Julie Stothard looks at how smaller schemes can make de-risking a viable option

St Francis of Assisi once offered this sage advice: “Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.”

For many trustees faced with seemingly never-ending deficits, the ideas of de-risking, self-sufficiency and buyout must indeed seem a mission impossible. This is often particularly true for those who are trustees of smaller schemes – perhaps schemes with ‘only’ a few hundred million pounds of assets.

This is a market that has been traditionally poorly served by some consultancy firms and insurers alike, many of whom have focused on the very largest schemes. However there are increasing opportunities, with the right support, to carry out targeted de-risking exercises.

A good recent example would be the deferred premium buy-in we helped our client, Kenwood, achieve.

However before stepping into the realms of such ‘possible’ exercises, it is important for trustees to do the ‘necessary’. The necessary, in our view, revolves around trustees ensuring three key certainties:

Pay a fair price for your core services

We would describe the core scheme services as constituting the actuarial work on valuations and funding, regular consultancy on legislation, regulatory developments and governance alongside an on-going investment framework.

We still find many smaller schemes are using up a large portion of their time and monetary budget on these core services.

Trustees should feel reassured that there are alternatives. Indeed it is a competitive market where fixed fees are available for some services and there is pressure on hourly rates and clarity of scope for others.

By ensuring that they are getting the best value for these core services, trustees can, in effect, increase their available budget without recourse to their sponsor and initiate other necessary projects to move de-risking opportunities into the realm of the possible.

Ensure your data is accurate and complete
Accurate and up-to-date data is critical for the proper operation of a pension scheme. The Pensions Regulator has also been very clear in its views and trustees have been obliged to comply with its guidance since the end of 2012.

But high quality data is also a prerequisite for the completion of many de-risking projects and can have a very material effect on the cost of some exercises. By way of example, Aegon estimated that missing spouse data can add as much as 15 per cent to the cost of a longevity swap arrangement. Even for ‘smaller’ schemes, this price differentiation can run into millions of pounds and have a material impact on the feasibility of an exercise.

Understand the relationship between your assets and your liabilities
Where de-risking is the focus, trustees need to target their energies on improving their scheme’s funding-level and reducing its funding-level volatility.

Too often this is handicapped by a lack of up to date information: knowing that an opportunity to remove risk existed several months previously is of little value. Even though many trustees receive information more regularly than the annual funding update, the reality is funding levels fluctuate on a daily basis and trustees can benefit enormously from the monitoring technology that is now available in the market from firms such as Capita.

A daily monitoring service allows trustees not only to make informed decisions but also to agree investment triggers to take advantage of market opportunities.

The road to self-sufficiency and wind-up is not an easy one by any estimate but trustees can begin to pave their way to success through these necessary preparatory steps.

By sourcing the most cost-effective core services, enhancing the scheme’s data and putting in place technology to provide daily insights into the scheme’s asset and liability profile, trustees can then open up a raft of de-risking opportunities and begin to make the impossible possible.

Written by Julie Stothard, director of actuarial, investment and DB consulting at Capita Employee Benefits

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