MNOPF readies for final derisking step

The scheme has moved into less risky assets and taken a holistic-balance-sheet approach to managing them in order to give itself the best chance of getting a good deal for the fund's more than 22,000 members.

Andrew Waring, chief executive of the scheme, told the 2012 National Association of Pension Funds conference last week: "There are opportunities to settle.

"We think to an insurer we are about 101-102 per cent funded, using an insurer's pricing."

Pension schemes that make their liabilities more attractive to insurers can agree a higher level of security for their members.

Before it is too late

MNOPF faces the same challenge with its closed DB section as many multi-employer schemes trying to insure their pension promises.

You have to look at all aspects – the cash flow is important

Andrew Waring, MNOPF

The old section – which closed to new members in 1978 – has no active members remaining. During the financial crisis its funding level dropped to as low as 82 per cent.

It now stands at around 96 per cent funded on a gilts basis. But due to market pricing Waring said the scheme was confident it would be effectively fully funded on a buyout basis.

As the scheme's membership matures, time is shortening for it to close its funding gap to a price where it can insure the benefits.

"You get nearer the end and the [funding] swings can get more violent, and the endgame is a very difficult process to manage," said Waring. "You cannot keep playing catch-up."

The scheme is run on a joint-and-several liability basis, meaning any further contributions would have to be split among its remaining employers. Many of these would not be able to pay.

Waring added: "[The scheme] is pretty clear that it would end up in several rounds of litigation if it tried to impose unreasonable funding obligations on a very small part of the employer population."

In March 2010 it secured a £500m buy-in with insurance company Lucida. A further £100m buy-in was completed with the same provider in March 2011.

The fund has now taken a lot of its investment risk off the table by shrinking its equity investments and moving to assets that will be attractive to insurers.

Waring added that the scheme has also benefited from integrating its actuarial, investment and covenant thinking – looking at these areas in terms of the scheme's route to buyout.

This is the holistic-balance-sheet approach recommended by the Pensions Regulator.

"It is looking at all the factors that make up the pension fund," said Waring. "Yes, the devil is in the detail but you have to get your thinking integrated; you have to look at all aspects – the cash flow is important."

The scheme faces a challenge making the employers and members of the old section comfortable with a buyout and is currently in dialogue with them about the potential changes.

How to sell your fund to insurers

When schemes come to the end of their derisking journey they face a challenge in presenting themselves to insurers.

[The providers] have challenges too and we have to align ourselves to an extent with what they are capable of writing

Mark Duke, Towers Watson

Mark Duke, head of settlement consulting at Towers Watson, told delegates the insurance market at the moment had similar challenges to funds pensions schemes in terms of capital constraints and the price of derisking.

This was leading to a diverse array of smaller, tailored deals being struck that match with the insurer’s investment needs. He said: "We've been looking at transactions where there is less risk for the provider."

This could be shorter duration deals, transactions that do not insure inflation and unfunded set-ups such as longevity swaps where the provider does not need to take on much capital.

Duke added: "The provider market is not a straightforward one at the moment – they have challenges too and we have to align ourselves to an extent with what they are capable of writing at the moment."