Trustees and employers have identified funding deficits as the most important scheme risk – but confessed they have had the least success in managing it
Consultants have advised schemes looking to derisk effectively to take a holistic approach to risk management, work closely with sponsors ensuring transparency and focus on liabilities.
Research by MetLife Assurance found a disparity between risk importance and reported success in risk management, noted by 89 trustees and sponsors.
The level assigned to risk importance should ideally correlate with how successfully such risks are managed. But the survey revealed schemes were failing to deal with the risks they felt were the most important to tackle.
While funding deficit was regarded as the most important risk, it was ranked in 12th place in reported success.
Asset and liability mismatch was deemed the third most important risk, but 11th in reported success. The fifth most important risk was longevity – which came last overall in reported success.
Mitigating risks
Martin Bird, head of risk settlement at Aon Hewitt, said it was vital for scheme managers to seek advice regarding the best investment strategy and alternatives.
This included making use of their parent company’s assets, such as property, intellectual property and brand value.
“People need to understand the scale of the problem – what’s available from the sponsor and that it’s not just about cash,” he said.
“Trustees and the sponsor need to work more collaboratively together to understand the risks inherent in the scheme – the asset liability mismatch.”
More time should be spent exploring and quantifying the sponsor’s attitude to risk, he suggested.
But the survey found 52% of sponsors and trustees had not sought to change the framework to co-ordinate more closely with their counterparts because they found the current system to be faultless.
One sponsor said: “We haven’t [taken specific steps] because over the past three years it would be difficult to envisage more communication between the two. The trustee and the sponsor, while they have different objectives, fully understand each other and their objectives.”
Similarly, a trustee added: “We have already taken earlier actions and we did not perceive this to be a problem.”
Director of JLT Pension Capital Strategies Simon Taylor warned trustees traditionally had a propensity to focus solely on derisking the asset side in the past, ensuring their assets were in line with their liabilities.
Taylor urged companies and trustees to shift their focus instead to the liability side and raised the merits of incentivising people to transfer out and structure their annuity in “exactly the way they want”.
Transferring out would be a favourable option for derisking, he said, due to the bespoke nature of this option.
“All members are entitled to a transfer value. Not many members take it because the terms pension schemes offer aren’t very favourable to the individual,” he said.
In this instance, Taylor said, the company should offer transfers with “full communications and individual financial advice available”.
Such an approach would work for both small and large schemes.
John Hatchett, pensions consulting actuary at Hymans Robertson, said a vital starting point in any derisking strategy was to have a clear plan.
Looking at sponsor covenant in one trustee meeting, longevity in the next and assets in a separate meeting was not conducive to effective derisking as they were all interlinked, he stressed.
“Scheme managers and members need to be able to look at the pension scheme as a whole rather than looking at the pieces,” Hatchett advised.
He also suggested more schemes should take advantage of the data on members to understand the risks involved.
The survey was comprised of 43% of schemes worth £1bn or more, 21% between £500 and £999m, 10% of both £250 to £499m and £100 to £249m and 16% under £100m.
