At Aviva, we're working with sponsoring employers and trustees of defined benefit pension schemes to understand and manage their pension scheme risk.
Working together to define the problem
The idea to delay pensioner payments came about in 2011 when we worked with a trustee and adviser for a particular scheme, to make sure we fully understood the barriers to their buyout. We found the scheme had:
• A shortfall between the scheme’s assets and the buyout price;
• Unchanged member benefits;
• An employer wanting to remove volatile pension costs from its balance sheet;
• An employer prepared to fund the buyout deficit but preferably by spreading the cost over a number years;
• A desire to agree buyout terms quickly rather wait until the scheme was fully funded.
With this information to hand, we developed the delayed pensioner payment option by focusing on the trustees’ priorities and the role of the employer in the buyout.
Finding a solution
The way this works is quite simple. The scheme can choose to delay pension payments for a number years from the day the deal is signed. For this simplified example, we assume that the deficit is equal to a delayed pensioner period of five years:
Graph 1:
The graph below shows a typical shape of pensions for a defined benefit scheme:
The orange line represents the pensioner payments the scheme expects to make over time. The cost for a traditional buy-in is based on the expected cost of providing the full pension payments, represented by areas 1 and 2.
In this example, the employer makes contributions to the scheme to cover the pension payments until the five year point marked on the graph. This means they can spread the cost marked as 1 in the graph over five years instead of paying it to Aviva as part of a bulk payment.
Setting clear responsibilities
We’ve made sure that the delayed pensioner payment option gives a clear split of responsibilities right from the start.
• Aviva takes the investment and mortality risk from the day the assets are paid and the contract signed;
• The employer agrees to pay additional contributions for a defined number of years at the start of the deal.
This has the dual effect of letting the employer continue with their wider objectives, and allowing the trustees to protect their members by substantially reducing the risk to the pension scheme at an affordable price.
The Aviva approach to managing risk
The delayed pensioner payments option gives trustees an interesting alternative if they have an employer that is comfortable supporting their defined benefit scheme in the short term.
Brian Bussell, Aviva’s defined benefit risk management director, regards this solution as “another demonstration of how our customer-focussed flexible thinking provides individually tailored solutions for pension schemes”.
Working with trustees and advisers to find a way around their circumstances and constraints pushed us to find an innovative way to solve the problem. That’s exactly how we think the bulk buyout market should work, with people finding creative ways to think around obstacles and finding a solution that everyone is happy with.
We believe it’s an attitude that works for all segments of the market, whether you are a small scheme looking for help with a buyout or a big corporate trustee with a risk management problem.
Find out more
If you’d like to find out more about Aviva’s delayed pensioner payment proposition or you have more general buyout queries, please email [email protected] or call Nick Johnson on 01904 872 345.
