DB maturity - Consultants focus on managing the end game

Published by Paul Houghton on

Estimated reading time: 3 minutes


A new era for the pensions industry, as defined benefit (DB) schemes reach maturity, is shifting the strategic focus of many schemes to the potential end-game of risk reduction, often leading towards buyout. According to our ‘Navigating Change’ report, which researches the views of senior trustees from large UK pension schemes, these structural shifts are transforming the way trustees manage schemes and have led to many seeking a new actuarial consultant.

With more than half of schemes saying they will change – or are considering changing – their actuarial consultant, consultants must focus on managing the scheme end game to stay relevant and meet the evolving needs of pension schemes.

As DB schemes begin to pay out considerable amounts in benefits, many have reduced investment risk, through the use of liability-driven investment (LDI), by matching assets to liabilities. The majority (58%) are now increasing focus on de-risking and the ultimate end-game stage as a priority, while 26% are considering it.

As the number of pensioner’s increases, DB schemes’ cashflow is becoming restricted, often negative. They now face the end game of securing benefits for their members, and this need for cashflow security requires some reconsideration of the scheme’s strategy.

Adapt or retender

This next stage of the journey is complex, and perhaps more importantly, largely unknown to most DB schemes. It requires carefully managing risk – protecting the scheme’s capital and preventing the need for increased contributions from the sponsor – while releasing cash to pensioners.

Changing actuarial consultant has been uncommon. It is often the longest established professional relationship a scheme has with an adviser. However, the research shows over half of the respondents are changing, or have already changed their actuarial consultant recently, or are considering a change.

There is evidence schemes feel their present incumbent may not be the necessary fit – a combination of approach, culture and skills – to rise to the challenges a scheme considering its end-game strategy faces. While the actuary that took a scheme through the past 20 years may have been one of the leaders in the field, they may not be the best suited for the next stage of its journey.

Therefore, consultants must understand the strategic priorities and challenges facing clients as they seek to maximise returns from actuarial consulting services – otherwise face a retendering process. The industry landscape has changed, and the service delivery of the scheme’s advisers must also evolve.

Fresh thinking required

Schemes entering this mature period of their development are after something new – a flexible and adaptable consultant, not tied down by ‘the way we’ve always done things’ or house rules on how clients are managed, and who can provide fresh thinking and new ideas.

The report reveals free-thinking and independent advice are two themes trustees value most in this complex period of change. Independence of thought can lead to finding a more innovative approach for the next stage of the scheme’s development. It allows the consultant to focus on the scheme’s specific needs and find the right strategies to achieve them. However, many trustees reported their consultant lacks these characteristics.

While our findings emphasise the need for a fresh approach, trustees are often unsure of what this would look like. Many trustees may not have fully considered all the skills that are relevant for this new phase, which include the core actuarial skillset and other technical and softer, interpersonal skills, as well as independence of thought and the free-thinking ability to think strategically beyond the standard actuarial valuation.

Schemes considering the appointment of a new actuarial consultant should target the most appropriate one for the next stage of the scheme’s development. There is no ‘one size fits all’ when it comes to appointing an actuary, so knowing what the scheme requires is absolutely essential.

While consultants need to adapt to the changing pensions landscape, responding to the needs of trustees, it is also the responsibility of trustees to clearly define what they are looking for and design a robust assessment process.