Your results 

Current strategy 

According to the research published in our Ready or Not report, the strategy that 75% of confident prepper schemes are skewed towards is buyout. 

After this, 17% are looking at consolidation, perhaps with a mind to be ready to look at buyout in the medium term, while only 8% are considering low dependency in the long term.

The next step

More than a fifth (23%) of confident preppers say their next stage of scheme development will be a liability management exercise, reinforcing the message that they are targeting the endgame. This is followed by a data cleansing exercise (14%), an investment review (14%) and a covenant review (14%). 

Perhaps unsurprisingly, 100% of confident preppers are satisfied that their scheme is already prepared for this next stage. 

Impact of regulation

Despite the high levels of confidence in their scheme readiness, 88% of confident preppers believe the soon-to-be formal requirement to set a long-term funding objective as a part of a valuation, will result in the scheme changing the way it manages the strategy. In comparison, fewer than two thirds in the 'room for improvement' category, one of the lower bands of readiness, are confident they will not have to change their strategy to accommodate this. 

We find this result surprising – is the confidence in the existing strategies misplaced?

Covenant 

Almost all (96%) of confident preppers consider their employer covenant to be extremely strong, with the rest not far behind. However, only a fifth (21%) believe they can remain confident in it for a period of 10 and 20 years. The vast majority are split across one to five years (38%) and five to 10 years (38%).

Assessing capabilities

Confident preppers tend to assess their trustees' capabilities every year (62%), with the rest leaving it to every three years.
Almost three quarters (71%) of confident preppers are confident in the assessment of their employer covenant and 67% in the skills of their investment adviser.

However, only 42% have confidence in their actuarial consultants. This low level of confidence is shared across the board, but it was only confident preppers that stated the greatest obstacle to the scheme comes from their advisers, in 100% of cases.

Despite these concerns, only half (50%) of confident preppers assess advisers and actuarial consultants every year, with most of the rest (46%) undertaking this every three years. The remainder do it every five years. This is somewhat surprising.  Confident prepper trustees are being assessed on their capabilities more regularly than advisers about whom many schemes have concerns.

More than two thirds (67%) of confident preppers are confident that their scheme's data is complete. However, a third (33%) are only somewhat confident in that area.

Inside and outside forces

Almost nine in every 10 schemes (88%) experienced something over the past 12 months that forced them into considering making changes to the existing strategy. 

For almost a quarter of confident preppers (24%), this was due to the maturity of the scheme. The next most common reasons for considering a change was pressure of regulation, investment performance, the loss of a key trustee or chair or covenant review.

Again, we find these results surprising, and they shouldn’t lead to a change of strategy. For example, the maturing of a scheme should be known in advance. 

The different approaches considered were wide ranging, and very similar across all categories. Accelerating buyout and a new investment strategy were the considered approaches for 62% of confident preppers, slightly edging out a new funding agreement with the sponsor. Just under half (48%) were looking at a data cleanse before accelerating towards buyout or self sufficiency. 

Never ending story...

Confident preppers are considering running the scheme indefinitely in 96% of cases. This suggests they are well on top of their various strategies and feel ready to take advantage of an opportunity to move towards buyin/buyout when that arises. 

That said, only 87% of confident preppers are confident that runoff is a viable long term plan.

Conclusion

It goes without saying that confident preppers are well prepared schemes. However, there is no room for complacency, as most confident preppers experienced something in the past 12 months – above and beyond coronavirus – that challenged their existing strategy. 

Trustees must remain vigilant and continue to stress test the strategy during the good (or benign) times to ensure it will protect the scheme during the bad, and that they are well placed to take advantage of any opportunities that might arise.

Running a pension requires teamwork, yet the levels of confidence in some key relationships are very low. Key advisers are crucial relationships, but like any service provider, should be assessed against key performance and value for money indicators. 

Trustees cannot be expected to have confidence in their strategy if they feel they cannot fully trust the experts advising them. 

Current strategy 

More than half (59%) of not fully confident schemes are targeting buyout, followed by consolidation (24%) and low dependency (17%). Almost two thirds (65%) are very confident in the confidence of their scheme data and a further 9% are extremely confident. More than a fifth are somewhat confident (22%). 

The next step

Not fully confidents also fall between the readiness of the other two groups in terms of identifying their next stage. They list a full range of options starting with 15% targeting a funding trigger or investment trigger, 13% covenant review and triennial valuation. Next comes a long term funding target (12%) and data cleansing and liability management exercises (each 10%). 

Not fully confident schemes are like the confident prepper group, in that they are very confident of the next stage of their strategy.

Impact of regulation

That said, they freely acknowledge the new Scheme Funding Code of Practice will throw a spanner in the works. As many as 85% believe they may have to make changes to their strategy to accommodate setting a long term funding objective as part of the valuation.

We find this result surprising – is the confidence in the existing strategies misplaced?  

Covenant 

There's good news when it comes to the covenant, as only 2% of not fully confidents believe their covenant is very weak. Of the rest, 76% say it's extremely or very strong and 22% somewhat strong. 

Their confidence in how long they can rely on this assessment is quite strong as well. It will come as no surprise it is stronger than the room for improvement group, but it is even stronger than the confident prepper schemes, with 43% of not fully confidents being confident of the covenant for between one and five years, 46% for five and 10 years and 11% for between 10 and 20 years. 

Assessing capabilities

As in the other groups, there is low confidence in some of the key relationships that shape the future of the scheme. They are less confident in their relationship with their employer than confident preppers (71%), but more confident than room for improvements (50%), scoring 59%. However, they are less confident than both when it comes to the skills of their investment adviser. 

Not fully confidents scored their confidence in this key adviser at only 54%, 5% lower than room for improvements and 13% lower than the confident preppers. 

As far as their fellow trustees are concerned, they have greater confidence than the room for improvement group, but still only 48% have confidence in them. 

Not fully confident schemes assess their trustee capabilities at similar intervals to the other groups: annually (56%) and every three years (37%), with 6% undertaking this every five years. 

Advisers and actuarial consultants are assessed annually (52%) every three years (43%) and every five years (2%).

Winds of change

When not fully confidents were asked if they had experienced anything over the past 12 months that had forced them to consider new approaches to their strategy, 96% said they had. This was the highest positive response of all groups, and does question some of the confidence in the strategies – should good long-term strategies be blown off course so easily?

The biggest trigger for not fully confidents was increased maturity of the scheme (23%), followed by the loss of a key trustee or chair, key adviser, the pressure of regulation and the triennial review. A corporate transaction was far lower down the list than for the room for improvement group. 

Those who did consider an alternative approach focused primarily on new investment strategy (60%). A new funding agreement with the sponsor was considered by 48%, and 44% looked at accelerating towards buy in/self sufficiency and liability management.

However, not quite one third (32%) made a change to their strategy. A full 80% who made a change chose to accelerate the buyout process (the highest of all groups). The next most popular options taken are associated with this, with 61% looking at liability management, and 54% looking at data cleansing. 

New agreements with sponsors were forged in 36% of the schemes making changes, while 32% began a new investment strategy. 

Never ending story…

A high number of schemes (92%) are confident that run off is a viable long term plan, although may look to secure liabilities in practice.

These schemes had a broad spread of what they considered to be the greatest obstacle to achieving their objectives. Advisers, regulator, trustees and the strategy itself all polled 22%. The sponsor was viewed as the least obstructive in the list, polling just 11%.

Conclusion

Not fully confidents are well prepared in many areas, but show concerns about some key areas of governance. That so many schemes were forced to consider or embrace change in the past year may indicate an excess of confidence in the strength of their existing strategy.  

Running a pension requires teamwork, yet many schemes identified concerns about the capabilities of key personnel. 

Key advisers are crucial relationships to the scheme, but like any service provider, they should be assessed against key performance and value for money indicators. 

Trustees cannot be expected to have confidence in their strategy if they feel they cannot fully trust the experts advising them. 
 

Current strategy 

The long term strategies for this group were spread quite evenly between buy-out, consolidation and continuing low dependency.

The next step

The next stage of development for the room for improvement category is a little more focused than in the other groups, with the primary targets being an investment review, a covenant review, or funding trigger, all scored 20%.

A liability management exercise and long term funding targets were next (both 13%).

While 60% of room for improvement schemes are confident the scheme will be prepared for the next stage, one third (33%) are not, while 7% remain unsure. The reasons for this lack of confidence fell into four categories. The most important was that the strategy has not been updated for some time (40%), a lack of advice from key advisers (40%), and ineffective investment strategy, 20%. 

When asked to consider the second greatest concern, respondents identified poor engagement from the sponsor.

Impact of regulation

Despite these concerns, fewer schemes in the room for improvement category than any other category believe the requirements from the recent Scheme Funding Code of Practice consultation will have much of an impact on their strategy. While the majority felt they would be forced to change their strategy in order to accommodate the changes, 27% felt they would not.

Covenant

Confidence in the employer covenant is high, with 41% saying it is very strong and 59% saying somewhat strong. Yet, most derive only short term comfort in the covenant, with considerably less than other categories. For almost two thirds of schemes (64%), this is for between one and five years, and 27% between five and 10 years. 

This will be a source of concern for room for improvement schemes, unless they quickly achieve their objectives of buy-out, consolidation or low dependency.

Assessing capabilities

Trustees are regularly assessed, with 59% of room for improvement schemes vetting their capabilities on an annual basis and 36% every three years. Encouragingly, the annual figure is 3% higher than the next group up ('not fully confident'). The three yearly assessment is undertaken by only 1% fewer room for improvement schemes than that other group.

Confidence in those who help to shape the scheme’s future is low. Though 45% of room for improvement schemes are very confident in their current advisers and actuarial consultants and 23% somewhat confident, almost a third (32%) only have slight confidence in them.

Investment advisers are not well thought of either, with 23% saying they have only slight confidence and a further 18% being somewhat confident. While this means that 59% overall are confident in investment advisers there is considerable uncertainty.

Room for improvement schemes assess their scheme's capabilities to a similar extent to other groups. The regular assessment of investment advisers and lawyers was the highest of all groups. Advisers and actuarial consultants are assessed by 64% of room for improvement schemes on an annual basis and every three years by 32%. This is more frequent than the figures show for either the 'not fully confident' or 'confident prepper' groups.

Winds of change

68% of room for improvement schemes said they hadn’t experienced anything to make them consider a new strategy over the previous 12 months.

Those who did experience a shock of some kind, in 20% of cases, it was due to the covenant review or increased scheme maturity. This was followed by the pressure of regulation, the change of a key adviser, investment performance or the triennial review.

These influences resulted in the room for improvement schemes considering a new investment strategy (67%), a data cleanse (60%), a new funding agreement with the sponsor (53%), or outsourcing investment strategy to a fiduciary manager (47%).

Some of these events, such as scheme maturity, really shouldn’t come as a surprise for well thought through strategies.

Never ending story…

50% of room for improvement schemes are very or extremely confident that they can continue in their current form in the long term, while the rest are somewhat confident that it can be done. 

Advisers are the room for improvement scheme’s biggest obstacle in only 25% of cases. In the room for improvement category, the sponsor is the greatest cause for concern and obstacle to a successful strategy. 

Conclusion

It is no surprise that room for improvement schemes have areas where they could be better prepared for the future. Funding may be tight, resources in short supply, but many of their concerns are shared with the better prepared schemes. 

Even very well prepared schemes have experienced shocks in the past year – and not all coronavirus related – that called their strategy into question. This suggests they may be overly confident about how robust their approach is. 

Concerns about key personnel are no different and it is essential that any key adviser relationship is assessed against key performance and value for money indicators, not personal relationships or a fear that the role is too important for them to be replaced. 

Trustees cannot be expected to have confidence in their strategy if they feel they cannot fully trust the experts advising them. 
 

You should speak to your scheme’s chair of trustees/legal adviser/actuarial consultant as a matter of urgency, or contact us to discuss your concerns and see how we can help you set an appropriate strategy for your scheme.