Meanwhile in investment terms, good, solid, stable returns can be made on steady assets. What about more commitment to UK infrastructure investments? It chimes well with Government hopes.
The graphic shows what is happening now with the ‘derisk and sell off’ plan contrasted with the ‘flat line’ approach. Given half a chance, most asset managers would go for the flat line strategy. But adding more prudence is an actuarial trump card.
All that is really required is for a new collaboration. The Pensions Regulator introduced an impressive framework for just that five years ago in the form of the Integrated Risk Management exercise.
So what happens if the scheme is overfunded? Excellent news. Plan for it now. For the trustees and sponsor there can be a ‘Reactivation Moment’ for the scheme on a DC basis in a new tier. This means that there is scope to improve benefits for members old and new.
For corporates, surpluses can be used to meet current DC contributions – an earnings boost. Improvements all round can be a positive feature for HR to put to new employees. And it’s good for Environmental, Social and Governance commitments and Section 172 Statements on its approach to employees.
There is no need to make the controversial step of winding up the scheme or taking cash out. Far better to make the scheme an explicit part of an employment approach.
Where next in the magic money tree orchard?
Defined Benefit (DB) schemes are expensive. But risks are manageable and, working within the regulatory framework, we can stop over-solving pension problems.
I have had a career in the City and then in traditional businesses with large pension schemes like Aga Rangemaster and Aggregate Industries. I now work within the pensions space.
My conclusions are:
• Corporations should get a grip on pensions and have their own models of the scheme’s economics in cash terms. If not you will be news managed to your cost, effectively and pleasantly by the actuary and ever helpful consultants. In particular, have all the facts you can gather in scheme specific demography and health profiles. In a world of “big data”, broad brush assumptions won’t do.
• Provide/arrange a way to help the scheme cover its downside risk of sponsor failure through third party guarantees. The financial capacity of the corporate can be linked to the financial strategy and requirements of the scheme as a package.
• Agree a low risk investment strategy for the scheme with a manager operating under a long term contract. They can access illiquid assets often in infrastructure with good yields. They should be expected to know about the payments as well as the receipts side of the equation.
• Think positively about the future. Agree how best to use such surpluses to add to current pension provision as well as improve benefits.
There will come a time for most schemes where the level of maturity, the running costs and the governance issues mean that a life insurer is the best answer. But until then many companies are running the risk of bailing out too soon.
Reactivation beats decommissioning – running on beats buyout for all stakeholders.
Invest the time and money so all harvest the benefits of the DB magic money tree.
So respond positively to Government challenge to invest in the UK economy. A timely attitude change can benefit employees past, present and future.
William McGrath
c-suiteps.com
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