Many schemes are now either closed to accrual or only have a handful of active members left and they are effectively in run-off.  Like any legacy liability, the pension scheme must be managed carefully to limit the risk it poses to the ongoing sponsoring company.  Key to achieving this is for scheme sponsors to devise a long-term endgame strategy for the scheme that is robust, realistic and can be agreed with the trustees.

We believe that an endgame strategy should consist of:

  • A realistic long-term target for the scheme, whether this is buy-out, entry to a consolidator or a run-off within acceptable risk levels
  • A contribution and investment strategy plan for getting there within the wider business constraints of the company
  • Identification of short-term measures – liability management exercises – that can be implemented to reduce the ultimate cost of the endgame or bring its achievement forward in time.

We can provide the scheme sponsor with a thorough understanding of the various pension 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. Once these pension risks and their impact are understood, we can help the sponsor identify a suitable long-term strategy to remove or reduce them. We can carry out return on capital calculations to ensure any risk reduction measures are effective compared to other competing demands within the business.

Finally, our position as a truly independent firm, our reputation for pragmatic advice and our collaborative approach means that we will work effectively with all stakeholders, including the trustees and their advisers, to ensure that your endgame plan gets stakeholder buy-in and is successfully executed.

Summary

We can help scheme sponsors design appropriate endgame strategies that meet their wider business risk objectives and are achievable within their constraints.  We can guide the sponsor through the agreement process with the trustees and then support the sponsor and trustees through the implementation of the strategy.

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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