Stockbroker and wealth manager Charles Stanley has created a working party to tackle risk within its pension scheme after reporting a £6.2m deficit increase.
The balance of risk and reward has dominated discussions across the pensions industry over recent months as deficits have been hit by the slump in yields.
Corporate defined benefit pensions took another blow this week as FTSE 100 schemes showed increased deficits of £5bn during the year to Dec 31 2014.
The big question I’d have if I was on that working party is, what happens if equities drop in the near-term and we have to sell those assets at depressed prices?
Stockbroker Charles Stanley’s deficit nearly doubled during the past year, rising to £13.1m from £6.9m in 2014.
In its annual report the company announced the formation of a working party “to examine the extent that pension risk can be mitigated”, with the aim of taking “positive steps in this regard during the current financial year”.
Calum Cooper, partner and head of trustee defined benefit at consultancy Hymans Robertson, said schemes taking a view that interest rates will rise faster than expected have seen big increases in deficits over the past year.
He said of the scheme: “They have an allocation of 80 per cent to growth assets, which is at the higher end of the range with only around 20 per cent in bonds – so they’re at a much earlier stage of the risk management process.”
The scheme currently holds £23.7m of a total £30.8m in equities, with £6.1m in bonds (see graphic).
Of the scheme’s £30.8m total asset total allocation, £23.7m is currently held in equities, with £6.1m in bonds.
Cooper said: “The big question I’d have if I was on that working party is, what happens if equities drop in the near term and we have to sell those assets at depressed prices? How will we then make up the gap?
Sir David Howard, non-executive chair of Charles Stanley and chair of the scheme’s trustee board, said the scheme had not been rebalancing towards equities, but rather the cash holdings had been reduced due to transfers out.
He added: “Nevertheless, this remains an immature scheme for which the trustees can take a longer-term view. The assets have performed strongly, but the increase in the liabilities relates to the sharp decline in gilts; hardly a unique situation in the market.”
Howard said current economic conditions meant it was not a favourable time to rebalance into the bond market and “index-linkers are not exactly flavour of the month in continuing conditions of low inflation”.
Collaborative approach
Working parties, subcommittees and pension oversight groups have become a common feature of the corporate pensions sector in the wake of the Pensions Regulator’s DB funding code, consultants said.
Lynda Whitney, partner at consultancy Aon Hewitt, said sponsor involvement in the development of ideas around risk and liability management brought benefits to the scheme.
“Sometimes it’s better to have them in the room whilst the development is occurring. You might have a working party that doesn’t actually have the power to make any decisions but does bring everyone together to develop ideas and to work through things,” she said.
Charles Cowling, managing director at JLT Pension Capital Strategies, said the structure and role of working parties would depend on whether they are set up by the trustee, sponsor or on a joint basis. But some exercises such as liability-management processes were sometimes better run by the company, he said.
“If you have a higher risk strategy your focus initially is on the investment strategy and you’ve got to make decisions [about] how you are taking the optimal level of risk in terms of which risks are rewarded,” he said, adding: “This is where the dynamic of a working party is important.”
