Companies and trustees of defined benefit pension plans are experiencing periods of greater volatility. For example, political and macro-economic events and the Pensions Regulator getting tougher with non compliance has resulted in uncertainty being the new certainty.
So, what are the consequences and what should you be thinking about? In this video, Jeremy May, UK Head of Pensions, takes a look at three key areas you need to consider.
A corporate pension client with multiple and varied pension schemes realised that their current one-size fits all approach to funding and risk management was no longer appropriate. As part of the valuation process they sought a new approach to develop an integrated pension risk management framework that would take account of the differences across all the schemes.
We developed a new pension cash and risk management framework, which proposed a new way of evaluating liabilities based on the maturity of the Schemes. This enabled each of the schemes to be analysed individually and categorised into its relevant maturity phase.
A principle based investment strategy was then devised for each of the maturity phases based on the nature of the liabilities in each of the phases allowing for the future evolution of maturity.
The framework also included target funding and hedging levels across the phases. In addition a new asset led discount rate which better reflected the returns associated with the new investment strategy was proposed. From this a funding strategy was developed incorporating the risk appetite and covenant strength of the sponsor.
Under the PwC approach, the new strategy reduced risk, maintained expected returns, while providing greater certainty around funding, cash flow matching, and cash contributions.
In this case, the consequence was a higher discount rate than Gilt plus method which helped justify current contribution with a lower contribution at risk.
The strategy was aligned with the integrated risk management analysis that was undertaken.
The current funding strategy needs to be revised
The current investment strategy is sub-optimal and not producing the results originally anticipated
There is a desire to reduce pension risk
A sponsor has a number of schemes and a principled based approach is appropriate across all the schemes
A sponsor has a number of schemes and there is a desire to evidence that all members are being treated equitably and cash contributions are appropriate for each scheme
A Gilts+ approach to valuing liabilities needs to be re-examined
Greater cashflow certainty and/or contribution certainty is needed
An existing strategy needs to be re-assessed ahead of the next valuation
You want to ensure a comprehensive approach to Integrated Risk Management