Establishing the infrastructure to help “small” DB plans regain solvency.

A series of fortuitous events has slightly eased the funding of funded UK pension plans but this shouldn’t mask the fundamental problems that persist among the majority of the smaller schemes

  1. Poor governance
  2. Inappropriate benchmarks
  3. Unrewarded risk
  4. Non-diversified growth assets
  5. Absence of longevity management
  6. Poor investment administration
  7. Poor record keeping
  8. Unconsolidated reporting
  9. Inappropriate advice

Not all small schemes suffer from all these problems but my definition of a “smaller scheme” (undefined by the TPR) is one where at least three of these problems persist.

I advocate the need for a platform approach, joined up advice, delegated authorities, data cleansing and LDI for smaller schemes.

Standards are improving but they are moving too slowly.

Small schemes need to have a plan.

Realistically, small schemes need to work with the insurance industry which has the capacity and scale to deliver what small schemes need.

PLAN A   is to find an insurer with the ability to provide;-

  1. An investment platform with high quality investment administration
  2. A range of funds necessary for various sophistications of LDI (including a full suite of bond funds and access to diversified growth assets)
  3. The capacity to deliver pre-agreed TAA within an IMA (Fiduciary Management or DB lifestyle as I have called it)
  4. A service priced to provide a margin for the insurer but value for the trustees from cross-scheme aggregation.
  5. A flexible pricing structure to accommodate the commercial needs of advisors and their clients.
  6. A capacity to manage the end game through buy-out/ buy in as required

There are a number of insurers able provide the infrastructure on which trustees and their advisers can construct their glide path strategies. At this juncture it is difficult to see any of them taking an immediate decision to build a small DB proposition along these lines. There are three reasons for this:-

  1. They are absorbing the changes to the EU’s position on Solvency II
  2. They are absorbing the latest position of the FSA on the RDR
  3. They are awaiting the outcome of the General Election.

Consequently, the needs of small schemes are not on the horizon of the strategic planners within the insurers. There is a need for someone to create a business case to take to the insurers to get their attention.

PLAN B; accepting that the insurers will not build the product without further motivation, small schemes need to provide such motivation by working together.

It is not relistic to expect trustees to do this for themselves.They need help from their advisors. These are independent investment consultants , scheme actuaries and professional trustees who are not conflicted by proprietary product

Insurers need to be convinced that this will fit into their strategy on their terms.

  1. Does this line of business enhance their Solvency II strategy?
  2. Does it enhance or conflict with their RDR strategy?
  3. What is the break even point from a cashflow perspective?
  4. What does it deliver to their embedded value (share price)?
  5. How does it enhance or detract from its brand positioning?
  6. What are the probabilities of it meeting its targets?

Essentially insurers are looking for a strong covenant with low acquisition costs , short pay-backs, low reputational risks and long-term strategic value. Not much to ask!  But a well run portfolio of DB schemes that sits exclusively on an insurers’ balance sheet is potentially highly attractive and could tick all the boxes.

So Plan B is to deliver on a silver plate, a book of business sourced from the stakeholders of small DB plans to an insurer to put the trustees of those schemes in a better place.

Most advisory firms acting for small schemes have not got sufficient schemes or a sufficient mandate from their clients to give the quality of covenant an insurer requires.

Consequently the business model may need  smaller firms with limited capacity to work with  other firms to deliver that covenant.

I estimate that to motivate an insurer , a minimum covenant of £1bn AUM would be required (delivered over a three-year valuation cycle). This represents a tiny fraction of assets under the control of small scheme trustees. PLAN B need not be overly ambitious

If you are an Advisor reading this, you could start by auditing your DB book and establishing;-

  1. The potential assets that could be transferred to the insurer’s balance sheet
  2. The likelihood of those assets transferring
  3. The quality of the book in terms of its potential would it stick with the insurer.

In summary

  1. Small schemes are missing a trick by not using their collective clout
  2. It is the advisory firms who can drive change but they too may need to collaborate
  3. The insurance industry is best placed to deliver the infrastructure needed.

 My aim is to focus my activities to bring these ideas to fruition. I would welcome your support.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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