C-SUITE PENSION STRATEGIES
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Wiping the Floor Under Mortality Improvements Brings Major Accounting, Cash and Actuarial Benefits in 2017

24/7/2017

 
  • The floor under mortality rate improvements typically adds more than 5% to pension liabilities.
  • Wiping the floor will bring major cash flow, P/L and balance sheet benefits and should be a 2017 accounts issue.  Even a reduction is worthwhile.
  • The case for the floor is thin.  It imposes an arbitrary minimum increase above the improvement tables.  It only impacts materially on cash payments over 25 years ahead and with negative long term real yields, this distorts the cost of the tail.
  • Since 2011 mortality improvements have “fallen off a cliff”, except for the most affluent.  The actuarial consensus is that it is not a ‘blip’.
  • Make the floor related payments a bullet at the end of the actuarial recovery plan.  Payment is contingent on a recount incorporating experience during the recovery period.
  • The recovery plan becomes deliberately back-end loaded.  If necessary add a bank/insurance payment guarantee.  Risk is diversified making both members and sponsor better off.
Indicative Calculation
Picture

​​The balance sheet improves by £50 million pre-deferred tax.  The P & L benefits by £50 million x the discount rate of a double A corporate bond.

Finance directors are outgunned by the chair of the pension trustees

14/7/2017

 
Time out.  A rethink is needed before contributing more cash

Finance directors are outgunned by the chair of the pension trustees.  The power shift from the company to the trustees has overshot.  Today the chair of the trustees has more time, better resources, an army of advisory troops and an excellent battery of financial instruments.  The collapse of a small number of schemes has created an atmosphere of extreme, over-bearing caution.  The posture of regulators has allowed trustees to attack dividends.  They are achieving remarkably easy access to corporate treasuries. 

What they do not have is the need to balance the interests of all stakeholders, now that most schemes have severed their interest in current employees and their pensions.  They have a desire to achieve financial independence as quickly as possible and to show them the way, they have formidable consultants with fixed income sales backgrounds to hedge and to annuitise.

Finance directors should hit back.  They need to have their own financial models of deficit recovery plans and put forward specific proposals.  They should be using bank and insurance backed instruments to provide guarantees that enable trustees to diversify and reduce risk.  They can regain ground by showing they stand for a pensions eco-system that is interested in both current and former employees.  This is set against the background of a corporate which uses capital wisely.

The Pensions Regulator produced an excellent framework document in 2015 on Integrated Risk Management that covers the sponsor’s covenant, investment and actuarial funding.  It encourages all parties to collaborate and get stuck in.  They should.  Power fills a vacuum.

Contributing too much cash - Reset the pension recovery plan

10/7/2017

 

Time for the Board to go back to work on pension liabilities

10/7/2017

 

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  • Home
  • Run On 4 Good
    • Run On 4 Good Pension Funding Strategy For 2025
    • TAS300 V2 trigger for rethink
    • Why You Should Run On 4 Good
    • Surpluses collapse the case for bulk transfers
    • Equity Investor Perspective
    • C-Suite Webinar
    • Members Letters and Questions
  • C-Suiteps Analytics
  • Commentary
  • FD Carol critiques risk transfers
  • Financial Services Growth and Competitiveness Strategy Call for Evidence response
  • DWP consultation response
  • Buy-ins Longevity swaps and other unforced errors
  • The unsustainable esg pensions carve out
  • Case Studies
  • The Team
  • Partnerships
  • Contact