Scapa sticks to risk management strategy with Pie

Over the past three years, nearly 30 per cent of schemes have used derisking methods other than hedging and bulk annuity purchase, according to Gowling WLG and PSIT Independent Trustees research. Investment changes, enhanced transfer values, flexibility at retirement, Pie exercises, trivial commutation and closure to accrual all fall within this category.

One of the key stages is just making sure that all the data’s there that you need

Ben Roe, Aon Hewitt

Scapa has been taking steps to reduce the liabilities of its £143.4m Scapa Group Pension Scheme in recent years. In 2014, it offered a flexible retirement option to some deferred members, saving around £600,000.

Scapa plans more pension projects

Around a year later, the company lowered its DB liability by £4m by undertaking a mortality study across its pensioner population.

Graham Hardcastle, Scapa’s group finance director, said in the 2017 accounts that the strategy of tackling cost and volatility “has continued into the current year”, and the company has “continued to see good take-up” of the flexible retirement options that are now embedded into the scheme.

He said Scapa carried out a Pie exercise for its legacy DB scheme during the year. This resulted in a reduction in the scheme’s liabilities and a past service credit of £300k, he said. “Scapa has other pension projects in the pipeline,” Hardcastle added.

Rob Dales, head of corporate consulting at JLT Employee Benefits, said: “These exercises are all about giving members choices that they didn’t have before, but those choices are designed so that if a member does select that choice, then the cost of providing that new benefit is lower than the cost of providing the original benefit.”

Dales noted how under a Pie offer, while the scheme liabilities reduce slightly, “the bulk... are still there”.

Checking data is vital

Of all the liability management exercises on offer, partial transfers have become particularly popular, he said. If they are structured properly, they can have the advantage of simplifying scheme benefits, with any complicated benefits being transferred out, Dales explained.

“Making sure members know what to do and making it easy for members to access advice” is very important, Dales said, adding that “trustees then have to rely on the [Financial Conduct Authority’s] regulation of the advice market, to make sure members are advised properly”.

Source: Scapa Group

Ben Roe, partner at consultancy Aon Hewitt, said that when carrying out incentive exercises, “one of the key stages is just making sure that all the data’s there that you need”. In some cases this can just mean having up-to-date addresses, he said.

Pies used to be slightly higher up the list of preferred liability management exercises, but “given where gilt yields are, and the freedom and choice regime”, there has been an increased move towards looking at transfer value exercises, Roe noted.

Martin Hunter, principal at consultancy Punter Southall, noted that there is more awareness of these kind of exercises now among trustees, and greater understanding that they are not “just an evil proposal that unscrupulous employers put forward [and] that there actually are a lot of scenarios where they are in the best interests of members”.

Punter Southall research, published earlier this month, suggested that only one in five UK funds have a high chance of being able to deliver member benefits in full.

Do not overlook investment risk

“One thing that’s worth highlighting to employers is that, yes — these things can help and can take some liabilities out of your scheme”, but “usually, the big risk is investment strategy”, said Hunter.

He continued that while incentive exercises can be useful, “if you’ve still got 60 or 70 per cent of your assets invested in the stock market, then there’s still a substantial amount of risk”.

During the same year in which a Pie exercise was carried out, the Scapa scheme’s UK equity exposure dropped to zero from 1.9 per cent, while its overseas equity allocation fell to 20.9 per cent from 27.8 per cent. Its exposure to government and corporate bonds increased.

Adam Porter, associate investment research consultant at Hymans Robertson, noted that many schemes have now realised that to get good diversification, they should be looking to widen the opportunity set, and having a big home bias can limit this.

Generally, over the past decade or so, schemes have been “allocating away from equities into other asset classes”, such as hedge funds, DGFs and private markets, because they offer quite attractive returns, he said.

Porter noted that there is an increased need for income, with schemes becoming increasingly cash flow negative. While schemes can get that income from equities, it is preferable to go for asset classes that have more contractual cash flows, such as real assets, he said.