Collaboration key to DB liability challenge, experts say

DB pensions have been closing to new members and future accrual as sponsors look to cut risk on their balance sheets. Low gilt yields have inflated liabilities and in many cases increased the cost associated with funding schemes.

Raj Mody, head of pensions at consultancy PwC, said the solution to the problem was a question of embracing new technology where it could save time and money, and better use of data.

Speaking at the National Association of Pension Funds' conference in Edinburgh today, Mody compared the challenge of DB liabilities with a “potholed road”.

“I wonder if we are repairing it pothole by pothole, which is a very inefficient way of doing things… We have the totality of the problem spread among 6,000 different pension schemes, that’s just in the private sector, involving over 30,000 individual trustees.”

We’re being presented with very big proposals for things like longevity hedges, so you’re being asked to make a huge bet at an enormous price

Paul Mulhern, Scottish Pension Trustees

The question of “volume efficiency”, he said, was one of ensuring solutions are used by enough of the industry to have an effect on the industry as a whole. However, he warned against imitating the Dutch pensions model wholesale.

“You might look at the situation of 6,000 DB schemes and maybe look at the example in the Netherlands, where they’ve condensed that to much fewer schemes, and say, ‘Is that the way to go?’," he said.

"I just don’t know if that’s practically feasible given the legal trust structure and everything else we have in the UK, but there is definitely scope for collaboration, if not consolidation.”

Paul Mulhern, independent trustee at Scottish Pension Trustees, said the size of trustee boards often made it difficult to reach consensus on big decisions, especially those involving complex financial products.

“We’re being presented with very big proposals for things like longevity hedges, so you’re being asked to make a huge bet at an enormous price.”

He added the industry was missing an opportunity by not engaging with trustees in the right way, especially around large derisking transactions.

“It’s going to be more likely for boards of trustees and corporates to dip their toe into some of these derisking ideas if you’re doing it gradually. I think if you’re presented with some huge deals, which may make some sense in terms of you’re doing them in one go, a lot of people will be put off by that… it’s still seen as an enormous decision to make. It’s almost this gradual build up of the good idea, [a] sustainable relationship with the board or advisor over time."

He added: "I think you’ve got more chance of dealing with a £2tn problem over 10-20 years than trying to crack it quickly.”