Professional Pensions spoke to leading independent trustees to understand how schemes are approaching the de-risking process and what effects insurer innovation and capacity is having on journey plans.
In this interview, conducted in March 2020, PP spoke to David Weeks, co-chair of the Association of Member-Nominated Trustees (AMNT).
PP: What factors are posing the greatest risks to DB schemes' capacity to pay their benefits?
Among AMNT's members, top of the list they would put investment volatility at the moment. Second, they would probably put covenant strength. And third is legacy issues: finding that records that were compiled in the 80s and 90s are probably not up to producing the sort of answers to questions that are now being put to them. From a spread of conversations with AMNT members, those are what I would put as my top three.
PP: What would you say the long-term de-risking objectives are across DB schemes?
The leading imperative is sometimes promoted from the trustees themselves, sometimes from the sponsoring employer. They would like to get the pension scheme off the balance sheet. Many schemes have been taken over perhaps once, perhaps twice, since the heyday of their original sponsor, and each time the new employer is less committed to the legacy issues and is keen to pull out of that. Linked with that I would put in cash availability to fund the immediate requirements.
PP: Is it all about getting to a bulk annuity as the end game, or is it about self-sufficiency?
I think the insurance-based solution is generally thought to be the gold standard - that's the way to guarantee our members' future livelihoods. Then there will be a spread of other activities.
The wildcard at the moment is the consolidator route, and there I think the task is to convince the existing trustees and the scheme members to be sure that the increased risk is justified by the reduction in cost compared with the full buyout.
PP: How is your scheme going about removing the risk to such a point where it becomes capable of being bought out?
There are several things that AMNT members raise. Potential insurers put great store on not wasting time; they want to be certain that when they're asked to bid for a proposition that the trustees and the sponsoring employers are both on the same page. They appear to find it quite draining on their resources to run what they regard as ‘fishing trips' to test the waters without any serious commitment.
And second one I'd point to is administration. Do you really know who your members are? Are you quite certain that you have a clear picture of the benefits that the scheme rules allow them to have? Third is simply the state of the market. There are about eight top operators in the market at the moment, and they look for different types of schemes in terms of risk, insurance, assets they'll need to buy, and what sort of size of they can cope with.
PP: Do you think there are enough insurance options for schemes out there? Do you find that there is enough competition in the market, especially amongst small schemes?
Among the AMNT's members, I think the picture they present is yes, there does seem to be enough capacity. But if the demand for buy-ins and buyouts increases, as it may well do, will there still be enough? I think the jury is out on that one.
PP: Do you notice differences in strategy between small and large schemes in terms of how they get to buyout?
There is no doubt that there is a big difference between smaller schemes and bigger schemes. That's not a great surprise; the bigger scheme is going to engage specific experts to address particular issues, while the smaller schemes have to rely on broader brush approaches because they haven't got the resources to engage the experts.
Also, the response from potential insurers varies. Do they want big schemes or do they want small schemes? I think it depends on the state of their balance sheet at a particular time. They don't want to be too loaded with a single big risk, but they might not want don't want the work involved with a lot of small schemes.
PP: In your experience, what are the knowledge levels like among trustees around de-risking options?
There is a hunger for knowledge. I think there is a genuine desire for more awareness of the options that are available. Partly it is down to demand, and it has partly been brought to public attention by the consolidators.
The Pension Regulator presents a picture of what they call the long tail of schemes, where governance is not really what they would like it to be. In that long tail, which we don't really see in the AMNT's membership, anecdotal stuff you pick up from the regulator suggests that they think some of those schemes aren't really aware of what they ought to be aware of, and need to be brought up to standard through some sort of amalgamation or injecting greater expertise in their trustee boards.