Industry Voice: Member options exercises can usually be tailored to make sure that they meet a pension scheme's long-term objectives.
Aon's 2017 Global Pension Risk Survey suggested that around one-third of our clients see a buyout as the ultimate destination. But whatever the long-term objective, member options can be designed to deliver savings. This can go hand in hand with an effective insurance strategy, so that for a ‘typical scheme' it can get you to buyout quicker and with less risk over the period.
Take a typical scheme that might be 70% funded on a buyout basis at the moment. This position would be expected to improve due to:
Asset returns;
Contributions being paid into the scheme; and
The scheme membership getting older and retiring, which makes them cheaper to insure.
Taking no further proactive actions, a typical scheme might then be 85% funded on the buyout basis. But this might still be a way off from ‘cheque writing distance'.
A suite of member options exercises could make the difference between getting to cheque writing distance, or having to retain the risk of the scheme for several more years. Member options can help bridge this gap by:
Implementing transfer options at retirement (2%)
Carrying out a pension increase exchange (PIE) exercise (1%)
Trivial pensions exercises (1%)
Bulk enhanced transfer value (ETV) exercises (4%)
None of these exercises on their own deliver sufficiently material buyout reductions but, in combination, could halve the remaining buyout deficit. Furthermore, it may only take a handful of members to take up a transfer option in order to generate sufficient buyout savings to pay for the costs of running the exercises.
To learn more about affording buyouts, click here for Aon's Guide to Member Options.
James Allinson is a senior consultant at Aon.
