Underwritten (Capital-Backed) Pension Solutions

Underwritten solutions are where a third party provider underwrites a defined benefit (DB) pension scheme’s journey plan to its target end game. Also known as capital-backed solutions, these are typically provided by an asset manager.

Underwritten solutions increase the likelihood of a pension scheme reaching full funding in a set timeframe by underwriting a level of investment performance to increase efficiency and security of members’ benefits.

Trustees and sponsors will want to understand the risks associated with these solutions such as counterparty risk and how they compare with other solutions in the market.

A number of market participants offer solutions to enhance the security of members’ pension benefits and deliver full funding in a more capital efficient way. The key benefits of underwritten solutions are:

The provider typically underwrites a level of investment return or funding outcome backed by an adequate amount of capital.
Reduced volatility associated with the pension scheme’s funding position and / or an accelerated expected time to reach the funding target through higher returns.
A capital buffer that enhances the security of members’ benefits and reduces the pension scheme’s reliance on the sponsoring covenant (although the sponsoring covenant remains in place).
Reshaped existing recovery plans to reduce the risks of further deficit contributions arising.

In addition to capital and asset manager services, providers of underwritten solutions are expected to deliver value through their ability to source suitable assets such as private market assets to enhance the risk-return profile of the pension scheme’s assets.

Underwritten journey plans are a relatively new offering. Trustees and sponsors may want to assess the following:

Does the solution enhance member outcomes?
What are the residual risks to trustees and sponsors?
What are the costs and complexities associated with the solution?

PwC’s approach to pension risk transfer is holistic, providing independent and unbiased support to assess the full range of pension scheme funding and de-risking solutions against their objectives.

PwC has in-depth knowledge of the solution providers, their respective offerings and criteria with regards to the suitability of these solutions to specific pension schemes. These transactions are likely to require a wide range of expertise that a multidisciplinary firm like PwC can offer to our clients.

For trustees and/or sponsors considering underwritten solutions, our multidisciplinary team can support in any of the following areas:

Assessing whether an underwritten solution or journey plan is expected to improve the security of members’ benefits and how these compare to other solutions
Driving scheme specific pricing and structure from market participants
Getting the pension scheme into a transaction ready state through data cleansing and by preparing benefit specification
Due diligence of the provider including review of the underlying asset strategy, adequacy of capital buffer and counterparty risk
Negotiating commercial terms with the providers
Transaction execution including covenant and legal advice in respect of the transaction
Communication to members and other stakeholders

PwC is also supporting a number of clients to develop their own bespoke arrangement and can facilitate an introduction to third party capital providers.