Don’t follow the “easy path” of defined benefit scheme funding

Alan Collins

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Financially strong sponsors of defined benefit schemes should not follow the “easy path” of scheme funding following the Regulator’s new code.  The new code may tempt some employers to seek lower contributions, a more risky investment strategy and to take their foot off the gas when it comes to de-risking and buyouts/buyins.  This would be a dangerous move and may harm the sponsor in the long term.

The vast majority of defined benefit schemes will end up in one of two places – with an insurance company or with the PPF – they will not run on until the last pensioner dies.  Therefore, given that the second option is usually caused by the insolvency of the sponsor, the aim is surely to reach a buyin/buyout with an insurer at some point.

With recent improvements in funding levels and with companies beginning to strengthen post-recession, 2014 is a year when many employers have finally been able to look again at de-risking measures.  Whether that be liability management, selective buyins or full buyouts, my message is to continue to de-risk and ultimately to get out as soon as you can.

There are employers who struggle to fund their schemes and they should never pay more to a scheme than they can afford.  The new code gives distressed employers some relief and hope that they will be given the necessary flexibility and time to sort out their funding deficits.  It should encourage these employers to engage in the funding and investment process and collaborate with trustees to reach positive solution for their schemes.  This will also mean reaching a landing on appetite for risk and looking at what might happen if things go off track which some employers may not have considered in detail yet.

Managing a defined benefit scheme is like climbing a mountain.  You may see what you think is an easy path, but following it inevitably takes longer.  If you can, just keep going straight up.

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.

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