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Risk Management

A better understanding of the risks involved in operating a pension scheme allows those risks to be decoupled and managed. In some cases the risks are ones that the sponsor is prepared to accept but in others the cost of controlling or even settling them can be worth paying.

We are able to provide the employer of a scheme with a thorough understanding of the nature of the various risks they face, now and in the future, together with the possible financial impact of those risks in terms of the balance sheet, the profit and loss account and cashflow requirements.

Pivotal to this understanding is an examination of the investment strategy being followed and the potential variations in funding level as a result. In addition, benefit design issues needs to be understood as they are central to the level of risk placed on the employer.

Once the risks and their impact are understood, action can be taken to mitigate them based on how much the employer is prepared to spend.

De-risking options

Once the nature and impact of the various risks faced by the employer are clearly understood, work can be undertaken to establish if it is possible to lay-off or settle some or all of these risks. The extreme position is to buy-out all the liabilities but this can be prohibitively expensive. However, the cost of a partial buy-in, potentially focusing on the pensioner members, has become a popular option in the last few years.

Other opportunities exist - for example, investigating whether deferred members would want to transfer their benefits to alternative pension arrangements that would be under their control. This can generally be undertaken at a reduced cost (members do not place as high a value on the risk as insurance companies do).

Financial markets are moving at an extremely fast pace to meet de-risking requirements. For example, solutions exist to hedge certain risks or buy-out benefits over a defined period or based on defined trigger events. At Barnett Waddingham we are in constant contact with the organisations developing these new solutions so that we are able to present the latest thinking and options to our clients.

Pension Increase Exchange

Although they are not a new concept many companies have recently been considering Pension Increase Exchange exercises as they look to reduce the risks and the cost associated with their pension scheme. This training video explains what such an exercise involves and how it could benefit your pension scheme. Please click on the image below to view the training video or click here to download a printer-friendly PDF version.

Longevity Swaps

Having been talked about for a number of years the first longevity swap was written in June 2009 and a number have subsequently been completed. This training video explains how longevity swaps work and explores some of the issues that exist in this developing market. Please click on the image below to view the training video or click here to download a printer-friendly PDF version.