We are able to provide the defined benefit (DB) scheme sponsor with a thorough understanding of the various risks they face, both now and in the future.  We are then able to quantify the risks in terms of the balance sheet, the profit and loss account and cashflow requirements.

Pivotal to this understanding is an examination of the scheme’s specific benefits and investment strategy  as these are key to the potential variations in funding level. Once the risks and their impact are understood, action can be taken to mitigate them.  We can carry out return on capital calculations to ensure any risk reduction measures are effective compared to other demands within the business.

Liability 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 often this can be prohibitively expensive. However, the cost of a partial buy-in, potentially focusing on the pensioner members or considering medical underwriting, have become popular options 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 and benefit from the latest pension flexibilities. 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. 

Smarter benefits at retirement

An increasing number of employers and trustees are working on new approaches to providing benefits to their DB scheme members which allows members to restructure their benefits to better match their individual circumstances.

We expect this approach to very quickly become a standard option in most schemes as it has the added benefit of enabling the trustees to discharge their duties to members whilst reducing the liabilities and risk in the DB scheme.

As part of their most recent actuarial valuation, Tate & Lyle were seeking to continue to de-risk their £1 billion legacy DB pension scheme, but without a significant increase in deficit recovery contributions.

As the company’s advisers, we helped them agree a funding plan that achieved the company’s objective of keeping cash contributions at their target level, while also delivering sufficient ancillary security for the trustees to remain comfortable with the pace of contributions, the level of investment risk being run, and the 2026 target for full funding on a self-sufficiency basis.

Prior to the scheme’s 2013 actuarial valuation, the company and the trustees had put in place a framework for future investment de-risking, which aims to reach a fully matched position within 15 years. In conjunction with this planned de-risking, and in the lead up to the valuation, the company and trustees also purchased a buy-in policy for a significant proportion of the scheme’s pensioner members.

We helped the company to align the scheme’s actuarial valuation method and assumptions to the existing de-risking framework, including a simplified technical provisions basis and an allowance for best-estimate investment out-performance within the recovery plan. This meant that the headline level of deficit reduction contributions being paid into the scheme could be maintained at the level set at the previous actuarial valuation (£12 million per year). At the same time, the company had also achieved significant progress towards de-risking the scheme over this period. The new aligned funding and investment target is to reach full funding on a self-sufficiency basis by 2026.

In conjunction with the committed deficit reduction contributions of £12 million per year, the company also set up a secured funding account, funded through annual payments of £6 million per year (for six years). The company and trustees have agreed a number of trigger events which may result in the release of some or all of the funds in the secured funding account into the scheme at various points over the lifetime of the structure.

These trigger events include under-performance of the scheme’s assets and a deterioration in the employer covenant, thereby ensuring that the agreement with the trustees forms a complete financial management plan for the remaining lifetime of the scheme. This innovative and integrated approach to risk management also ensures full compliance with the key principles set out in The Pensions Regulator’s new code of practice on ‘funding defined benefits’.


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