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DB Pension Policy Reset to Secure and Build

22/6/2022

Board Agenda Item:
DB Pension Policy Reset to Secure and Build

A Proposal to embrace role as long term sponsor and ensure scheme supports Group’s S172 Statements and ESG Commitments.

As the Board considers employee loyalty, wage inflation and its ESG ethos then adopt a C-Suite Pensions Strategy to:

Run on long term
Introduce modernised tier for today’s employees
Recycle surplus cash to benefit current and past employees
Align investment strategy for scheme funds with sponsor’s publicly stated ESG objectives

The impact can be transformational. Now there is a Corporate Wealth Fund.

Steps to implement:

Agree an Integrated Risk Management plan with the trustees with new Trust Deed and Rules introducing a new (Collective) Defined Contribution tier. It sets out when excess cash can be allocated on a discretionary basis to the pensions of former and current employees.

Agree a FiduciaryPlus contract. It sets a long term, low risk, fixed income led asset management framework. It matches the real cash payments against a good quality member database. It contains a guaranteed sum from a third party financial institution covering the remote risk of the sponsor’s failure.

Update Statements of Investments and Funding Principles to incorporate sponsor ESG commitments and member preferences.

Update employment terms. Pension provision can again be a key feature for HR in staff recruitment and retention. A competitive advantage in a changed employment environment.

Reassess the Governance. The sponsor’s nominees have a key role in a policy reset away from annuitisation as the “endgame”. They can demonstrate that long termism works for all stakeholders.

Boards can replace the DB pension “get rid” mindset with a forward looking “run on” policy which works for sponsors, pensioners, employees and shareholders. Secure and build. Embrace the Corporate Wealth Fund.

Watch FD Carol Animations to see how running on benefits all

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How Strong is the Case for Defined Benefit Buyouts in 2022?

23/3/2022

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Is Risk Transfer a Gamble?

Derisk and buyout is the settled journey plan proposal of the consultancy community. Time for a time out? A new approach may be needed given changing regulations, economics and saver attitudes. Better options are available to benefit all stakeholders.

Solvency II

Hotly debated reforms could change risk transfer pricing materially and change the quality of security the insurance industry offers. Wait?

Life expectancy

2023 CMI tables will incorporate 10 years of stalled improvements; Covid and the 2021 census. Wait?

Sponsor severance value add

Is giving up the sponsor / PPF insurance package for that of the insurer / FSCS worth it? The cap on PPF payments was found to be illegal and more members retiring the PPF cuts diminish. Calculate the difference in cash for members.

Discretionary benefit improvements:

Are benefit improvements with inflation increasing available as was once a regular practice? Not if trustees have ceded control to a life insurer.

Control of savers' investments

Court ruling confirms on-sale of annuities is O.K. Long term who runs the money and what do they invest in? What about ESG and UK economy considerations?

Run on and improve

With employee wages and loyalty renewed concerns for sponsors , recycling surplus cash could help savers and sponsors if the scheme runs on.

At present demand outruns supply provided by a small group of insurers and reinsurers. High margins continue to be achieved by life insurers. A market rebalancing with trustees having more options and time would be healthy

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How the Context of DB Pensions is Changing in 2022

14/3/2022

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Government wants to reform Solvency II but the Prudential Regulatory Authority and the insurance industry have very different views on what should be done. More research and consultations will take some time.

Since 2011 industry expectation for life expectancy improvements have been excessive. Actuaries think the impact of Covid is best ignored for now. They will produce updates sometime in 2023 when 2021 census data is also available.

As schemes mature and with the PPF’s cap on pension payments declared illegal, the proportion of a scheme’s savers’ pensions covered by the very well funded PPF is growing steadily as time "drifts" by.

The Court ruling re the annuity sale by Prudential to Rothesay showed savers have no continuing control over who provides their pension or the investment policies pursued after a buyout. Benefits of current ESG initiatives can be lost.

Renewal of a pension scheme – running it on with added sponsor backed security generating funds for all stakeholders is a practical possibility. It is supported by major fiduciary and asset managers, banks and insurers.

We have developed a proposition FiduciaryPlus in close partnership with leading financial institutions. It can make running on happen.

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Endgame? No, a New Beginning

28/2/2022

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When Running on with Purpose Beats Buyout
Members and their trustees should ask for added benefit payments
Where is your trustees’ journey plan taking your scheme’s members? The Gold Standard endgame is presumed to be annuitisation .But running on can beat selling out to a life insurer.
Where the sponsor is strong, seeking the expensive buyout prize of the regulatory upgrade from Pension Protection Fund backup (well funded) to that of the Financial Services Compensation Scheme (untested) brings few carats and many sticks. The change is hardly relevant for members if there is already a major group involved firmly tied in by the Pension Schemes Act 2021. How do you then assess best interests of members? Think what is lost in annuitisation apart from cash:

Corporate memory of the scheme.
The possibility of improved benefits for members.
Member input through trustees into where funds are invested – a growing factor.
Control over who is providing the pension as control over sell on is lost.

And what’s the rush? With the increased possibility that Solvency II regulators will become less restrictive, buyout funding pricing should improve. And the long years of ever falling discount rates have ended.
So before accepting the “derisk and get rid” route, members should want to know their trustees asked for more. With inflation back, are discretionary increases from surpluses in the schemes a possibility? Why not? Is there an alternative? Yes. There is a practical way forward to have a bespoke, run on solution.

Sponsor / trustees obtain a risk diversifying back up sum to cover any gaps to low dependency from a major financial institution.
Reset the investment strategy to “run on” with a stable, low risk, FiduciaryPlus contract led by a leading asset manager.
Plan for success. Write into the rules now how surpluses over agreed funding levels are to be allocated to members, old and new. Benefits can accrue ahead of becoming payable with surplus allocation assessed.

And will sponsors be interested? Yes – if running on means that surpluses can be used to fund current contributions into a reactivated, repurposed (C)DC tier of the scheme. Sponsors have made S172(1) commitments to look after employees’ interests and have ESG frameworks in place. Pensions are back on Boardroom agendas because intergenerational fairness is a big issue. The fear and uncertainties surrounding pensions, developed over 20 years, can be addressed in a better strategy. Its time to reconsider what is a rewarded risk
DB pensions need not be an endgame run by the derisking tribe – but can bring a new beginning in all stakeholders’ interests. Not the end; not a game. And it starts where trustees re-examine what is in the best interests of members and think ahead. Run on with purpose.

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DB Pension Policy Reset to Secure and Build

How Strong is the Case for Defined Benefit Buyouts in 2022?

How the Context of DB Pensions is Changing in 2022

Endgame? No, a New Beginning

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