The Powerful ESG, S172 and HR Cases for Sponsors Backing “Running On” Their Defined Benefit Schemes
Old DB pension schemes can re-emerge as assets supporting their sponsor’s ESG commitments, S172 statements and HR strategies. Members’ benefits can improve through C-Suite’s Discretionary Step Up mechanism, and from there surpluses generated. Better pension provision can help address today’s wage inflation and staff turnover issues as was the case a generation ago.
If the scheme is left to run on long term with steady investment policies, sound governance and with prudence truing up, it is possible for surpluses to arise. Plan for the upside now – as pensions reconnect with their HR purpose.
A Board policy adjustment has a big impact. It resets the agenda.
The Board can ask the trustees for a 10/15 year plan as an option with stable return assumptions. Trustees then reset the Statements of Investment and Funding Principles. Best membership data (to increase confidence in payment schedules) is gathered. A new financial model is produced. It is much more attractive for everybody.
A fantastic ESG opportunity emerges. Here are large sums available to make a difference to the ESG agenda because the sponsor and the trustees do not have a “get rid ASAP” mindset.
Asset managers with long term horizons and running fixed income led plans can provide the predictable, stable returns which transform the assessment of the scheme.
Sponsors running on can go back to the basic purpose of the scheme when it was established - to provide good pensions for employees.
Surpluses generated can, on discretionary and supplemental bases, be used to improve pensions of current members and fund pensions of current employees in a new tier for the scheme. For members worrying about inflation above contractually committed levels of, say, 5%, discretionary improvements have a new significance. Surpluses used to cover current provision can reduce current DC costs to the employer and improve the pensions provided to key workers. That brings cash and earnings benefits to sponsors. It also is a concrete example of a Board taking action aligned to Section 172 policy statements to take employee interests into account in Board decisions. Reality not rhetoric.
To run on, trustees may want added third party back up of any future gap to self-sufficiency. A capital buffer is needed against sponsor failure. Contingent third party cover is readily available. As its purpose is directly aligned to S172 and ESG parameters, for which funds are specifically available, it would be on attractive terms. It is a good use of finance capacity. Allocating a maximum sum to meet the objective of providing time to the pension scheme to operate in all stakeholders interest looks absolutely “on message” for a modern corporate. It should again attract equity investors interested in ESG strategies.
At present, Solvency II regulations for insurers are under review. The Treasury wants to see costs fall and more return seeking assets held. Life expectancy assumptions are in doubt because of Covid. Both factors make the value of risk transfer speculative. A ‘timeout’ in such transfers should follow. The timing of a switch to running on is good.
A Board stating it wants to “run on” an old scheme to benefit all stakeholders can expect positive employee, trustee and investor engagement. A proactive response to recruitment and retention issues is timely. A clear cut action by the Board can be taken. It has long term upsides - financially and ethically.