Specialist engineering company IMI has completed a pension increase exchange exercise and a buy-in, as trustees become more comfortable with liability management measures.
Pension increase exchange exercises give members the option of swapping their rights to receive annual pension increases for a one-off increase to the amount they are receiving as a pension. A Willis Towers Watson survey showed that out of 49,000 pensioners, 35 per cent accepted a Pie offer in 2016-17, up from 27 per cent in 2015-16.
The IMI Pension Fund was split into two new funds in 2014, one for deferred members and one for pensioners. The Pie was offered to members of these new funds in March 2016.
One of the key advantages of a pension increase exercise is that you can change the shape of benefits to be more attractive to an insurance company
Hugh Nolan, Spence & Partners
“Around 3,000 members were eligible and, in total, 776 members accepted the Pie offer,” according to the scheme, which has a total size of £1.4bn and is 90 per cent funded.
In June 2016, the trustees of the Pensioner Fund purchased a £158m buy-in policy with Legal & General, which has a focus on covering the risks associated with pensioners aged over 75, said the scheme.
These exercises are not the only risk management activities that the scheme has carried out over the past few years.
In 2010, the trustees completed two buy-ins for £325m, helping reduce mortality risk by 20 per cent. More recently, 598 members accepted an offer of a trivial commutation lump sum and the cash offers accepted totalled £10m.
Pie advantages
Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners, said that “one of the key advantages of a pension increase exercise is [that] you can change the shape of benefits to be more attractive to an insurance company”.
Source: Willis Towers Watson
He also noted how data cleansing can help in terms of getting the best possible price from the insurance company because “if your data’s not totally clean, you get a small added premium to allow for the fact that there might be some corrections later on”.
Smaller schemes may not be stung too badly by this, but for large pension funds, “it’s worth going through the effort of cleaning the data up” to save money, he added.
“There are three levers that trustees can pull” to address deficits, said Nolan. These are investment strategy, contributions from the employer, and liability management exercises such as Pies and enhanced transfer values.
“If, as a trustee, you’re not using that third lever, then you’re not using the full array of tools at your disposal and you’re not managing the fund as well as you can,” he said.
Making an informed decision
Alex Waite, partner at consultancy LCP, said that in the past, many trustees were concerned about offering Pie exercises, fearing that “members will do something dumb”, regret their decision and take legal action.
However, trustees have now realised that “if [they] communicate it really well, and offer people access to a financial adviser”, people are more likely to make an informed choice, he said.
Phoenix Group opts for second helping of Pie
Phoenix Group’s PGL Pension Scheme last year completed a pension increase exchange exercise, but despite only wiping £3m off liabilities, the company says the exercise met pre-implementation expectations.
Simon Taylor, partner at consultancy Barnett Waddingham, also said that trustees are becoming more comfortable with offering Pies.
He said there is now more acceptance among trustees for Pies, which "in the right circumstances, can be a good outcome for the scheme and the members”, he said.
Pies and other, similiar risk management measures are usually done as part of a wider derisking strategy.
“Most of the Pie exercises we see these days are generally done in connection with an annuity purchase” because “you get a better premium rate for insuring a flat pension than an inflation-linked pension”, said Taylor.
While the financial effects of carrying out a Pie can often be quite small relative to scheme on a whole, "you’d probably only tend to do one if you’re then going to go and do a bulk annuity”, he added.
