Backdrop
Life expectancy assumptions are coming down further in actuarial tables. Liabilities will fall by around 3% to 5% for most DB schemes. Current annual payments to pensioners represent typically around 3% to 5% of assets after recent falls in value (and greater falls in liabilities for the better financially managed).
Trustees and sponsoring employers can decide to distribute additionally benefits to past and present employees in response to changed information. This is a straight improvement to the scheme’s finances. The assets are not affected by the assumption changes – as happened when interest rates increased.
Standard industry thinking is to accelerate Risk Transfer Transactions. The industry’s tables are prepared by practitioners with vested interests in risk transfers – but even they are reducing assumptions. Analysis of the real risks and values is needed.
Proposal
The benefit of discretionary payments can be split. Increased payments can be made directly to past and present employees. These comply with tax and legislative requirements. C-Suite has worked through the detailed requirements. Sponsoring companies can also benefit from reduced contributions.
The principle of discretionary payments is established. The time over which they are made and the delivery mechanisms are then scheme specific.
Campaign Objectives
The objective is to help past and present employees in the tough current economic circumstances. The over funding of pension liabilities makes this practical. Sponsors and trustees may then see their pension schemes as Flagship ESG policies not a legacy problem. That results in having a long term investment strategy for the scheme and having a modernised tier within it.
Pension scheme members and current employees can put the case to sponsors and trustees for “one less one more”
HR as well as finance teams of corporates should take up the opportunity. Member nominated trustees are particularly relevant. Here is a break point where intergenerational unfairness is on the agenda and there is an action plan.
Scope to Exercise Discretion is there. Use it.
On the author – William McGrath
William McGrath, the writer of this piece has this to say about himself and his organisation C-Suite.
Former Aga Rangemaster CEO, now addressing alternative pension funding strategies for corporates. We advocate sponsors make their DB pension schemes a flagship for their ESG policies. We’re working closely with companies who are ready to make a mindset change to see pensions as a positive business feature, benefitting all stakeholders.
During my 25 years’ boardroom experience, as FD and CEO, I dealt with and addressed substantial pension funding issues. Now my consultancy, C-Suite Pension Strategies, provides corporates facing the same challenges with the answers.
C-Suite Pension Strategies’ purpose is to enable you to protect cash resources, the real value of members’ pensions and improve modernised current pension provision. C-Suite provides you with the analytics and ideas to enable you to do just that.
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