Telent: Buy-in could have scuppered scheme rescue

In September last year, the Stanhope Pension Trust, which manages the GEC 1972 Plan, signed a deal with insurer Rothesay Life to insure the pensions of all 39,000 members.

Just over a decade earlier at the close of the global financial crisis, it was poorly funded and a collapse and carve-up had reduced its sponsor’s adjusted earnings to around £30m a year.

Guided by a risk management framework focused on improving the chances of getting to buyout, the scheme “held its nose” by giving complex credit assets left from the crisis to specialist managers, and began building an esoteric and illiquid income portfolio. Allocations to secured leases, insurance-linked securities, direct lending and secured finance were all introduced along the scheme’s journey plan.

Hedged against interest rates and inflation, the scheme was able to slowly build up its funding level, without the sponsor backing that is typically needed to accept equity risk premium.

“We had to come up with a long-term strategy that addressed those uncertainties,” said chair Brian Duffin, who stressed the importance of well-resourced and nimble sub-committees.

He said: “The extra return you get from credit more than meets the cost you’ll have from things like defaults.”

Buy-in option dismissed

To moderate the influence of any one stakeholder, the Pensions Regulator intervened in 2009’s actuarial valuation to ensure that the scheme had three member-nominated trustees, three employer-nominated trustees and three independent trustees.

That left the Telent scheme with two key remaining risks – that its sponsor could become insolvent, and longevity risk.

A buy-in or longevity swap could have hedged the latter, and ‘buy-in to buyout’ has become a common strategy for many defined benefit schemes. But Mette Hansen, Redington’s director of investment consulting, who advised the scheme on investment strategy, said this could have proved fatal to the trustees’ ambitions.

“If they had decided, at a relatively early stage, to lock into a partial buy-in, they would have lost their ability to invest their way out of potential problems,” she said.

Hedging makes the difference

The difference in fortunes between schemes like the GEC plan and those schemes that are still flagging with low funding levels can be attributed to the trustees’ open-mindedness and desire to question prevailing logic, said Redington co-founder and chair Dawid Konotey-Ahulu, particularly when it comes to interest rate mean reversion.

He summarised the reaction of the scheme and its advisers to the prospect of stubbornly low interest rates as asking: “Well, it’s probably not going to happen, but what if it does?”

Mr Konotey-Ahulu added that “nobody had any answer to any of those questions” in the pensions industry at the time.