JLT’s Allan Lindsay, Buck Consultants’ Ciarán Mulligan, Capital Cranfield’s Jonathan Reynolds and Invesco’s Georgina Taylor discuss how investors interpret multi-asset strategies, in part one of PW’s multi-asset investment roundtable.
Myles Pink: Let’s come back to this idea of a journey – and we are all recognising these things cannot be instantaneous and take many years – do you find employers are prepared to think along the same sort of time horizons or do they want quick results?
Kim Nash: Employers typically want to see a result for their spend. It is always difficult when you are talking with finance directors because they want immediate results. This is not as easy in a pension scheme. They are not thinking about the next 20 years because the likelihood is they will have moved on by then. So you are trying to get them to understand we can do things in the short term, but actually what we are aiming for is a particular long-term objective. It can be quite difficult to get that message through to them and for them to understand.
When you are setting a journey plan, some of it revolves around what contributions are coming in. It can be very difficult to get them to sign up to what contributions they want to pay in over the next 20 years, especially when you are getting to the position where you are fully funded on a technical provisions basis and you have a secondary target of buyout.
Ian Smith: So how do you go about setting up a flight path?
Julie Stothard: It varies a lot from client to client. Some will have a timeframe in which they want to get things sorted. I always look at it as a journey plan, and as with any journey you do some assessment and preparation upfront and make some decisions. What is your end point? Is it buyout or is it self-sufficiency? Do you have a timeframe in which you ideally want to get there? That might vary between the company and the trustees.
For instance, we saw a recent transaction where the company needed to get the buyout done very quickly because they wanted the risk off the balance sheet before they sold part of the company. So the company might be aware of something that is coming, or the trustees might have concerns about something that is going to happen in the business in, say, five years’ time that means they want the pension scheme risk removed before then.
Trustees need to look at how to spend the money in the meantime, making sure that the money is being spent in an appropriate way. There are some things advisers do – and I say this as an adviser – that are not valued much, and getting the fees for those down to an absolute minimum can free up some money to do more interesting and valued things.
Smith: What are those kinds of things?
Stothard: It means getting the core compliance work done as cheaply, efficiently and cost-effectively as possible. Other items are things like investment management expenses. So if a client is in active management, do they really value that or would they prefer to be in some form of index-tracker to free up the money to do other things? If you go from active equity management to passive you could easily free up enough money to do daily monitoring and all sorts of stuff.
Nash: The governance budget completely drives what you can do for your derisking framework as well. Some trustee boards I sit on are very good – you can access them whenever you want to; others you struggle to get them in a room at the same time for four meetings a year. So the derisking mechanism would need to be very different for each party. In the same way, you only have so much goodwill with the sponsor, so you can only go to them a certain amount of times and ask for a certain amount of money. And you need to make sure you are using that money wisely and that you spend it in the areas where you are going to add the most value.
Marian Elliott: That ties in with having a holistic programme. Once you set your objectives and have been very clear about what your priorities are, vis-à-vis where you are trying to get to, then you can do a value analysis. This means you can check you are not spending all your money in one particular area when you have set priorities in other areas to reach your goals.
Robin Bell: The perception I have is that in places where trustees are engaged in forums there is a lot of room for improvement with engagement between sponsoring employers and trustees. Somehow the dots sometimes do not get joined up. So if you look at any of the areas we touch on – say how a derisking strategy can have an impact on the Pension Protection Fund levy – that is of interest to the sponsoring employer, but the engagement levels can be very weak in relation to issues like that. There can be marked differences, but in many cases the issues of the trustees, the scheme members and the sponsoring employer are very closely aligned and yet they sometimes operate in parallel universes.
Pink: Having just listened to that, two things occur to me. One is that as insurers, we find it very difficult to be involved in processes where employer and trustees have not sorted out between them an awful lot of what they are trying to do together. It is all very well saying trustees are the custodians of the assets in the pension scheme so we should work with them, but if a contribution to the cost of insurance is required and the employer is not brought along, you will just stumble before you get to the end of the process.
The second thing is when it comes to preparation, people underestimate how much the process of getting to buyout can be facilitated by working on the pension scheme’s assumptions in relation to, for example, longevity or inflation. A lot of the work in processes is actually about getting the trustees and scheme actuary to set realistic assumptions – potentially with some prudence – before thinking about whether the buy-in or buyout is good value for money.
