Liability management exercises are most effective as part of an endgame strategy to help reduce the cost of, or speed up the time to, reaching your ultimate goal. Some or all will be suitable for you depending on your particular circumstances:

 

Implemented correctly, individual member transfers out of a DB scheme are an excellent way of settling liabilities, removing risk and giving members flexibility.  We can help sponsors structure an exercise in line with their objectives including setting the groups of members in scope and the level of any enhancement or not. We can also make sure that the sponsor adheres to the Code of Good Practice for Incentivised Exercises if appropriate.

We have carried out extensive due diligence on the main firms who can provide DB transfer advice to members and can help sponsors and trustees select a trusted firm to advise their members. We can also provide member communications and education tools to help the members assess whether a transfer might be something of interest to them. A key part of the advice process is the FCA mandated Appropriate Pension Transfer Analysis and we can also provide this to the adviser firm to make sure that the whole transfer process is integrated and seamless from the member’s point of view, with calculations carried out using consistent data. 

For member who are already receiving their pensions, there may be scope to offer them the option to exchange some of their isncreasing pension for a higher level of non-increasing pension. This can give rise to small reductions in ongoing liability, provide a non-cash profit through the P&L and in some cases can have a significant effect on bulk annuity pricing.

We can help scheme sponsors structure a PIE exercise including determining the members in scope and the exchange terms, provide member communications and education tools and select a trusted firm of member advisers to partner with. We can also ensure adherence to the Code of Good Practice for Incentivised Exercises if appropriate.

Following the 2018 Lloyds judgment, all schemes which have members who have built up a part of pension before April 1997 called a ‘Guaranteed Minimum Pension’ (GMP) will need to decide how to equalise GMPs for sex discrimination. This will impact most DB schemes in the UK.

Legislation provides an opportunity to simplify benefits as part of this process – known as GMP conversion - and can provide sponsors with options to minimise the additional costs imposed. Additionally, providing members with options about how their benefits are simplified could provide a saving to the scheme, in a similar way to a PIE exercise. Whilst there are challenging technical issues to work through, we can use our specialist expertise in this area to integrate GMP conversion into your strategic endgame planning.
 

Exercises can be run to consider other options members have, though they typically have less impact than those above. For example, there may be scope for small pensions to be paid out as lump sums but, by their nature, these tend not to have a significant effect on the risk or financial position in the scheme.

 

Summary

Liability management exercises are now a mainstream part of managing the costs and risks of DB schemes.Sponsors should be taking advantage of them and have a number of options they can consider. We can help you select, structure and execute all liability management exercises. Crucially, we will work with you to make these exercises part of a wider endgame strategy for managing your DB liabilities.