Rebus reviews funding strategy in self-sufficiency drive

Defined benefit schemes commonly target either self-sufficiency or bulk transactions such as buyout as a way of ensuring the future safety of benefits for members.

Earlier this year, for example, DIY retailer Kingfisher's scheme moved £150m into matching assets after reaching surplus. However, experts have warned against completely abandoning risk when it can still be used to help the scheme grow.

Insurance services company Rebus closed its scheme to future accrual on January 1 2014. It recently appointed consultancy LCP to “identify and implement a revised investment strategy” covering “both the near term strategy and a forward-thinking plan on how the strategy should develop over time”.

Edward Hayes, chairman of the trustee board, said the closure of the scheme was the “final motivating factor” to review the investment strategy.

He added: “The trustees' strategic approach is to seek to derisk the scheme incrementally by locking in investment gains at appropriate intervals.

"The long-term aim is ultimately to achieve funding self-sufficiency by a gradual shift towards an investment portfolio which matches the scheme’s liabilities.”

As of the last valuation, the scheme had £66m in assets and around 550 members, comprising 450 deferred and close to 100 pensioners.

Lee Dodds, partner at LCP, said: “The focus of our proposals is going to be on better returns,” using methods such as diversifying the portfolio and introducing liability-driven investment.

He added the team would look at moving away from the traditional investment-grade corporate bond mandate into other areas, such as multi-asset credit.

Rushing towards self-sufficiency

However Joanne Livingstone, principal at consultancy Punter Southall, said while many underfunded DB schemes were using self-sufficiency as the target for their investment strategies, the definition could vary wildly and is often misleading.

Schemes define self-sufficiency for themselves, so deciding what constitutes self-sufficiency varies on how the liabilities are valued, whether there are reserves to account for longevity risk and other factors.

“[At the] long end we’ve got a 40 basis-point difference between swaps and gilts,” said Livingstone. “Usually they’ll have some kind of risk left in the scheme.”

The common approach is to try to outperform the market and bank gains through matching assets, but Livingstone warned schemes should not rush to remove all risk before they have to.

She said: “The danger is [that] you take too much risk off the table too soon, especially if there’s some covenant behind the scheme. If we take risk off then things go badly, you have to re-risk, and then you’re doing it at the point you’re trying to pay benefits, which is a bad time to be doing it.

"You’re taking that risk back on in 20-30 years' time when you don’t have much covenant left.”

Schemes can still afford to take risk while they have employer covenant and time for their investment bets to pay off, she added.

“Take risk at the right sort of times,” Livingstone said. “It is all down to covenant.”