How to de-risk your pension scheme

Three pension experts give their advice about how to make your scheme safer

[l-r] Mike Carpenter, Mark Poulston and Nigel Jones
[l-r] Mike Carpenter, Mark Poulston and Nigel Jones

 Mike Carpenter is a director at Carpenter Rees

1.    Take some risk off the table. Look closely at your scheme to reveal any pensions payable over and above the statutory minimums. 

2.    Try ‘quick wins’. Look at Pension Increase Exchange early retirement exercises that can lead to genuine long-term liability removal with an associated fall in cost. Pension annuitisation can also provide a route to de-risking in cases where schemes have a more mature membership.

3.    Think about the health of your membership. The market for annuities has gone beyond simple purchases. It is possible to review the life health of your pensioner population and note this in price negotiations with the provider. 

4.    Employer covenant history is virtually meaningless. What matters is the future and how the employer is going to cope. What are your plans for the development of revenue streams?

5.    Diversify. Making use of diversified strategies that lower volatility can have a beneficial impact on the smoothing of investment returns.

Mark Poulston is a pensions partner and lawyer at DWF

6.    Identify risks.  Assess your scheme. Some of your biggest risks and liabilities might be unknown.

7.    Check feasibility. Will your scheme’s rules (including the power of amendment) permit the measures you want to take?

8.    Engage early. Employers should discuss their proposals with the trustees at an early stage and secure their cooperation.

9.    Consider contracts of employment. Employers should consider if the proposed measures infringe contractual rights.

10.  Communication is key. Consultation and member communications are critical for legal and practical reasons.

Nigel Jones is a pensions actuary and director at Mitchell Consulting

11.  Obtain value for your deficit contributions. Continuing to pour contributions into a large deficit could be a wholly ineffective use of capital. Instead, use this capital to reduce or remove liability, leaving both the employer and the pension scheme balance sheets healthier.

12.  Reduce your liability base. De-risking should mean removing liabilities fully. This immediate crystallisation and removal of long-term risk can be of high material benefit to the employer and the trustees alike.

13.  Risk can be shared. De-risking solutions can offer genuine value to pension scheme members. Different members have different objectives, and this should not be dismissed out of hand.

14.  Do not forget about the asset side. De-risking solutions often focus disproportionately on scheme liabilities. Remember, there are two sides to funding. De-risking of assets should be investigated in tandem with liabilities.

15.  Engage with the scheme trustees. This is mandatory, but will also lead to a more effective result. Both employer and trustee should, ultimately, be seeking a reduction in the risk presented by the pension scheme.

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