Pippa Stephens discovers how the General Healthcare Group (GHG) scheme prevented a five percentage-point drop in its funding position thanks to implementing an investment sub-committee and a triggered derisking strategy
The £100m scheme, with a high allocation to equities, put in place a dynamic derisking strategy in early 2009 which enabled it to safeguard against losses.
Since September 2010, the funding level of the scheme dropped from 87% to 77.3%. Had the derisking strategy not been in place, the funding level would have currently been 72.4%.
The trigger mechanim meant the scheme would switch its investment allocation out of return-seeking assets and into liability-matching assets as the funding level increased to bank gains. When the funding level dropped it would make the reverse move, to take advantage of cheaper-priced assets.
Ian Maybury, managing director at Redington, the scheme’s consultants, said a fundamental part of the strategy was efficient governance procedures.
General Healthcare Group experience
Chairman of the scheme Rita Powell said the dynamic derisking strategy shaped the new governance procedures.
She said the big change was moving away from quarterly meetings to calling meetings in response to trigger points at very short notice.
Meetings would be held through conference calls with the newly-delegated investment sub-committee, comprised of trustees, asset managers, investment consultants and the sponsor’s representative.
Powell said: “It was a complete sea change in the trustee board – they saw the light and they were willing to be available at very short notice.
“They realised there were decisions to be made at the strategic level if we were to get this thing off the ground and it wasn’t just a case of leaving it to the fund managers and looking at historical performance.”
The new procedures were introduced over a period of six months.
On whether she would do anything differently with retrospect, Powell added: “Perhaps we could have done things more quickly, but it was such a big change for us to implement. I think we had to make sure we took everyone with us and that everyone was comfortable with the changes and decisions that were being made.”
Maybury said the secret to good governance was the triggers which, when initiated, enabled GHG to rapidly change the asset allocation of the scheme.
He emphasised the trigger mechanism only initiated the need to reconsider the scheme’s investment choices – and the relevant investment choice was not set in stone prior to the downturn in the market to allow for flexibility.
Depending on the economic climate, schemes may want to derisk through increasing equity exposure if markets are looking up, or re-risk by putting more money into growth assets should there be a downturn.
Guide to good governance
Nick Secrett, director of the pensions practice at PricewaterhouseCoopers, set out criteria for good governance to avoid missing opportunities emerging from changing market conditions.
The investment sub-committee should meet every two months as current trustee board quarterly meetings were not sufficient to take advantage, Secrett said.
Funding rate – if the scheme’s funding improves by more than a certain amount in terms of return-seeking assets and inflation movements;
An absolute view of the market – if the FTSE reaches a specific pre-agreed level, assets could be sold, or
Inter-trades or inflation become hedgeable at certain levels.
Any good governance structure should be able to deal rapidly with movements in the market. Delegation to a third-party investment manager or sub group is one way of ensuring this.
Trustee boards showing good governance will have invested heavily and “upskilled” – improving their skill sets by introducing a recognised independent, hiring their own chief investment officer or adding individuals from within their firm with relevant strengths.
Schemes will also strive for the highest quality of adviser and arrange more frequent meetings, have a clear idea of what they are trying to achieve, what risks they can tolerate and what their timelines are.
John Belgrove, principal at Aon Hewitt, said: “Philosophically successful schemes are open-minded to a whole range of investment ideas so we can use the full breadth of investment opportunity and investment instruments – so a much faster decision making process. It’s not the average scheme.”
But Belgrove warned volatility can challenge even a "really fast” governance structure.
“It’s not the job of pension schemes to act like date traders – it’s not in-out-in-out on different price volatility. These are decisions taken in the sense of their overall journey plan,” he said.
Those unable to meet the budget required for such specialist resources may look towards outsourcing, such as using fiduciary management services.
