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How to plan for your pension scheme’s end goal

Planning for a pension scheme’s end goal needs a long-term investment approach.

| 5 min read

With the majority of UK-defined benefit (DB) pension schemes now closed to future accrual, many trustee boards are focused on preparing for their scheme’s ultimate end goal.

That might be buyout (when all of the scheme’s assets are transferred to an insurer) or self-sufficiency (where the scheme is fully funded and can continue to run with minimal pressure on the sponsor).

Most schemes are planning for the first of those options, with the percentage of pension schemes targeting buyout steadily increasing.

Deciding on the scheme’s goal or objective is the first and most important step towards planning for the future.

Bob Campion, Senior Portfolio Manager, Charles Stanley

“Deciding on the scheme’s goal or objective is the first and most important step towards planning for the future,” says Bob Campion, Senior Portfolio Manager, Charles Stanley.

“When we speak to trustees, even those who adopt self-sufficiency investment targets often accept that eventually, they would expect to buyout. As a result, it is not unusual for trustees who have hit this target to then change their objective and plan for their ultimate goal,” he adds.

Trustees targeting either buyout or self-sufficiency often work with a fiduciary manager, who can manage portfolio design, long-term investment management and day-to-day decision-making for the scheme, while trustees remain responsible for the scheme’s investment beliefs and long-term goals.

Jonathan Craddock, Senior Manager at EY says that fiduciary management for end-game planning “allows schemes to act quickly and capitalise on opportunities, including de-risking to lock in gains and reduce risk within the portfolio.”

Planning for the journey

While the average anticipated time to buyout is falling, it is still a lengthy process. For schemes working with a fiduciary manager, also means having a long-term strategy for the portfolio.

“The approach a fiduciary manager takes will ultimately depend on the maturity of the scheme and its funding position,” says Craddock. “As funding improves, a fiduciary manager’s flexibility to advise on different end targets and then tailor the solution accordingly will be important, as trustees keep refining the definition of the end goal.”

Carrying out de-risking activities such as buy-ins, will also have an impact on investment strategies, adds Campion. “The main challenge when targeting a buy-in is to devise a strategy that ring-fences part of their assets used to fund the buy-in without taking too much risk with the remainder of the portfolio. This is particularly important if there is an overall deficit, as this will become larger as a proportion of trustees’ overall assets once the buy-in has been funded.”

Arriving at the end goal

As trustees get closer to buyout settlement, trustees and fiduciary managers need to focus fully on making sure their portfolios match the needs of potential insurers.

“There is a lot of work to do even before an insurer will quote,” says Andre Kerr, Head of Fiduciary Management at XPS Group. “Once you have a planned timeline to settlement, you need to start migrating the assets into a position where you can lock in the pricing of an insurer.”

“For our clients who have moved to buyout we have typically constructed buyout-aware strategies,” says Campion. “These are designed to be an extremely close match to buyout pricing – effectively locking in the funding position on a buyout basis.”

Campion says that these strategies are focused on “a mix of UK government and corporate bonds but could involve liability-driven investment if there is a deficit due to be funded later.”

Choosing a fiduciary manager

“The skill set of a fiduciary manager helping clients to de-risk is different from that of generating high levels of returns in a portfolio,” says Kerr. Some questions for trustees to explore when choosing a fiduciary manager for end-goal planning are:

  • Can the fiduciary manager support our de-risking strategy? “It’s important that trustees understand the fiduciary manager’s ability to carry out their strategy and understand how their portfolio will evolve as the scheme de-risks,” says Kerr. “Ask if their approach is in line with your investment beliefs.”
  • What approach will they take? “Some fiduciary managers prefer a mechanistic approach where de-risking is done automatically once pre-determined triggers are hit. Others prefer a consultative approach where de-risking is considered on a case-by-case basis,” says Craddock.
  • How will the fiduciary manager achieve our end goal? “Ask the fiduciary manager to explain how they will work with your scheme as you get closer to transacting with an insurer,” says Campion. Craddock adds: “Agree on an appropriate framework at the outset to avoid any surprises along the way.”

Almost every trustee board is now focused on defining an end goal for their scheme and establishing an investment strategy to achieve it. Fiduciary managers can help by creating and managing a portfolio that will achieve those goals and support trustees with their investment aims throughout the long-term de-risking process.

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How to plan for your pension scheme’s end goal

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