De-risking - What the survey said and three key points

Ian Chapman-Curry: Hello and welcome to this webinar brought to you by the Pensions Team at Gowling WLG and PSIT.

Today we will be presenting some fascinating findings from research that we have carried out on pension scheme trustees' attitude to de-risking. What are pension schemes in the UK really doing to de-risk and what do you really need to know? I am Ian Chapman-Curry and I am joined today by Chris Stiles and Ben Goldby from the Pensions Team at Gowling WLG and by James Double and Wayne Phelan from PSIT.

Hello everyone!

All: Hello!

Ian: Today's webinar will last for approximately 45 minutes with time for your questions at the end.

So, what are we going to be covering?

Ben is going to be opening up with an overview of the survey results, and then we will hand over to Wayne and Ben to look at some of the de-risking strategies and the importance of Integrated Risk Management (IRM) as part of that.

James and Chris are then going to be looking at some of the impediments around de-risking and how to overcome them, then everyone is going to be coming together to talk about benefit specifications, clean data and some of the pitfalls.

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And now, over to Ben for an overview of the survey results.

Ben Goldby: Thanks very much, Ian, and thank you, everyone, for joining us, and a special thanks to everybody who filled out the survey for us, which is the whole reason that we are here today and somewhat ambitiously gone for a drum-roll here at the start but we are revealing the survey results for the first time.

So on to the headline results, and you will see that de-risking is much more popular than even we thought it was! 91% of you have it on your agendas over the next three years. Just some interesting information there about where these results come from: so we had around 70 responses from scheme sponsors, pensions managers, trustees, professional trustees, advisors - everybody who is involved in the lifetime of a scheme and you can see there a wide range of different types of schemes and different sizes of membership and indeed value.

So if we can move on to the next result.

So 70% of you believe that de-risking is now developed jointly between the trustee and the sponsor and I think that is very encouraging, particularly for the Regulator who is very keen on encouraging that. I suspect that had we done this five or ten years ago, we might have got a slightly different response, but that is definitely encouraging from our perspective because it feeds into everything that we are going to talk about with integrated risk management which Wayne and I are going to come on to talk to you about in a little while, and an interesting difference here between the small schemes which tend to be more trustee led and larger schemes which are even at the present much more jointly developed.

So looking at the importance now of agreeing a strategy, now 54% of our response had not got an agreed de-risking strategy in place yet, and I think this probably fits with our experience of the market that everybody has got it on the agenda but how we actually go about doing this and how the strategy is developed is still up for grabs at the moment. The larger schemes are slightly more likely than the smaller schemes to have the strategy in place but we are going to talk a little bit about what that strategy looks like in the next part of this webinar, and we are also going to look at how different schemes of different sizes can approach it and the role of the independent trustee in helping you with that.

So a few regrets - you have certainly all had a few round this table. A third of those responding to the survey said they regret not getting to the de-risking sooner…and, again, interesting to note the difference here between hedging approaches, so larger schemes are more likely to have hedged, whereas, the smaller schemes are less likely to have done so, and also, looking at the buy-in/buy-out market, only 15% of those who responded have already done a buy-in and buy-out, and we are going to have a little look at what the market looks like in 2017, what the capacity is like, as compared to the expectation, and the some of the trends in the market going forward.

So looking at clean data, which is, obviously, everybody's favourite topic! We will come on to look at the importance of how clean your scheme's data is, but we were quite surprised by this number, this is quite high - 69% of those responding to the survey believed that their scheme data is clean. We are just going to have a look at what clean scheme data actually looks like, and also the importance of the benefit specification again - getting that agreed and in place before you approach the market.

So looking at the timeframe, and this is again an interesting result from our perspective, that more than half aren't looking at targeting insurance over the next three years and we are going to come on and look at all that is available to you for a de-risking strategy, and how buy-in and buy-out is just a small part of that picture actually, and also that more than half of you believe that it will be over ten years before you are able to transact and what some of the reasons behind that might be and how maybe that timeframe can be moved forward as well.

And finally, we are going to have a look at the impediments and challenge some of the myths maybe that have grown up in the industry over the years, looking at whether or not buying-out is the key driver, the key block, as it were, to de-risking, and in particular, challenging the theory that the sponsors' lack of finances might be the main reason for this. Actually less than a quarter of those responding said that that was going to be the main obstacle to de-risking. Pleased to see that Brexit is not too big an issue for everyone, although, feel free to ask us questions along the way if that is posing a problem to your scheme. We feel that there is enough Brexit in the news at the moment, so we are going to focus on de-risking from other avenues, and I am going to handover to Wayne now. He and I are going to discuss de-risking strategies and how they might be tailored to your schemes.

Wayne Phelan: Great. Thanks, Ben.

So, obviously, we have moved on to the food session, so I have got a pie, which, sadly, there is no pie physically in the room in front of me - which is a bit of a shame, but I'll set aside my disappointment, and perhaps focus a little bit around de-risking, and probably not that long ago, people's view was "I run the scheme and then I buy it out"…and I think it was seen as, mechanically simple as that. I think we have seen in recent years a lot more thought around that, particularly as most schemes have drifted away from being able to secure their liabilities with an insurance company, so there's been a couple of really key elements to this.

The first one is managing your liabilities by looking at some of the liability management exercises, and some of these are really just about tidying up the records, a little bit before you get there, so trivial commutation exercises, for example, don't by their very nature of the fact that they are trivial, really deliver much in terms of reducing your liabilities in any way shape or form. But they do mean that when you go to transact, you don't have lots of small entitlements that might be unattractive. On the other hand, we have seen the rise of flexible retirement options, certainly most schemes have been helped by various changes that have come through that have really thought about pensions as being a bit more flexible from a member's perspective, so these are now less controversial for trustees, I think, to accept. And our old friend, things like enhanced transfer value. Well we used to have to offer enhanced transfer value, but most of the people that I know that have been looking at transfer values towards the end of last year and through into this year have probably been surprised what a normal transfer value would deliver for them, so we have certainly seen more appetite for that sort of thing.

So that's on the managing the liabilities element, so that is clearly something that's evolved more options around that, and also, on the investment strategy side. So, it was not that long ago that small schemes, I'm never quite convinced what a small scheme is they all seem as challenging as the big schemes!, but let us say it was less than £100m, it was more challenging to enter into things like liability-driven investment. That's really not a challenge any more. I think one of the big challenges is explaining the benefits of it both to trustees and sponsors. Anyone who has been trained well will come out of it feeling they know more about it and have more appetite for it, but there is nothing worse than feeling less informed after having gone through the process. So I guess the lesson out of things like that is just making sure that you get the right person giving you the right level of information.

Then there are obviously things around growth asset allocation. There are more options around that. We have seen with currency weakening that currency hedging, there might be some tactical short-term decisions. Currency, I think, is a nil sum gain in the long-term, but if you can bank a few gains along the way, then people are thinking about that, and also longevity swaps. They are, if you thought LDI was complicated, try and get your head around a longevity swap will make your brain frazzle for a little while! But, again, they can be used. They can be used in increasingly smaller schemes, but when you use them, I think, is the key here, because if you are going to transact soon, then actually the full buy-in or buy-out might be an easier way to achieve that same level of risk reduction.

I think that really takes me through my points.

Ben: Yeah? Thanks very much, Wayne. That is a really helpful look at the tools that are in the toolkit. I am just going to have a quick look at the pros and cons of actually using those tools…and really, why de-risking can work for schemes of all sizes from small schemes that Wayne was just talking about, right up to the larger schemes, so I think the key advantages we picked out there are really one for each of the key stakeholders. Firstly improving the funding position of the scheme, well that helps both the trustee and the employer in the long run, but it is certainly going to make valuations and the like a lot easier for trustees. Tailoring the investment and funding to match the liability reduce the contributions, well, obviously, those reduced contributions are going to be very attractive to the employer but also reducing the level of risk and making sure that the benefits going to be paid is going to be attractive to both trustee and member, and, ultimately, to the employer as well, who does not want the downside of not being able to follow through on the pensions promise. So there are advantages for all key stakeholders in a pension scheme in using the de-risking approach. I think that the disadvantages, a lot of them can be borne out of misconceptions and old myths about the dangers of de-risking, and particularly, the dangers of pension liberation, obviously, that remains a live issue for the trustees and something which needs careful consideration, but a well-run de-risking exercise using any one of the tools that Wayne talked about earlier can offer a significant advantages and the risk of it can be managed quite comfortably. There is obviously the cost of sponsoring some of the bigger ticket items, in particular, the buy-out or purchasing any sort of insurance policy. Although, obviously, if you have planned for that and that is your long-term goal, then that can be managed over time…and certainly managing the relationship between the trustee and the company, and in particular, the trustees' concerns, is absolutely key to the process.

So we are just going to move on and look at integrated risk management now, which is the hot topic for both the Regulator and for many employers and trustees, and hopefully, this little graphic just easily demonstrates what integrated risk management is all about, it's about balancing investment funding and covenants to come up with a strategy that is in the best interests of members and also provides protection to the trustees and guarantees the engagement of the employer. Certainly when we have looked at recent Regulater guidance and recent case law and even the lessons coming out of situations like BHS and British Steel, the focus that has been put on integrated risk management as a better way of the trustees engaging with the employer and ensuring the long-term sustainability of the scheme is absolutely key.

Just moving on to look at how agreeing a strategy fits in with that. I think one of the key things that we have taken out of IRM is that engagement and communication is absolutely vital so even where a scheme might be distressed or where an employer might be unable to fund at the level it would like to, getting that engagement going, getting strategy days in place, getting a discussion going between the company and the trustees is absolutely fundamental to agreeing the strategy and moving forward with de-risking, which is ultimately in the best interests of all parties. So information sharing agreements, getting management information out there early to trustees, letting them know about big changes that might coming at the employer, absolutely fundamental, so we believe that IRM really built on what a lot of well-advised trustee boards and well-engaged sponsors are already doing. It does provide that overall framework for you to use when it comes to de-risking.

So, Wayne's going to take over now, and just look at how to tailor a strategy.

Wayne: Yes, I think pensions' strategy has not always been very well thought through. Sometimes that is just the business plan that people come up with that is either in Word or Excel and say which in August we are going to sign up the scheme accounts and next year we will get an actuarial valuation. Now let us be clear: that is not a strategic plan - that is just an operational plan.

So, really, fundamentally, you have got to start from the premise of what do you want to achieve? We have some clients, where prospect of buy-out just really is not on their radar. Interestingly, because one of them is an insurance company and therefore, all it is doing is moving the risk from themselves on one element of their balance sheet onto another element of their balance sheet.  But that's not the norm, I think most sponsors nowadays probably have the view that if they could not have defined benefit pension schemes, then that would not be an unacceptable place to start, but sadly, they are not starting from that position.

So there are really components that they build on here, so what level do you want to get to and what is your aspiration of funding buy-out self-sufficiency? What is a realistic timeframe and again I think we saw too many actuarial evaluations where it would just add three more years on to it. Well, I do not think that really helps because that doesn't help drive the investment strategy, doesn't help what you might try to do to reduce the overall liabilities. Really engaging with the employer as early as possible in the planning is key because there is no point the trustees burrowing away doing lots and lots of work and getting very excited about it if that does not match the sponsor's objectives they are really bringing them along, sharing some of the benefits as you go through is really key, and really demonstrating risk mitigation. You know it may mean that their contributions overall might be higher but they might for example be more stable, and most employers like stability of expense as opposed to having one year spending £20 million on deficit repair contributions and the next a million because you're not rewarded when you are the one paying the £20 million. And I guess our old friend optimism, I think, lots of schemes I have seen now where some of the people in the room have said "Gilt yields will revert" - I do not know whether revert means something different to what has actually happened but I think it does and therefore this 'ever optimism' that yields will rise and solve the problem, clearly is not a good solution. It needs to be more tangible than that. Again accepting that they might not, they might go down even further, which is a daunting prospect but also a realistic one. So, really it is sort of fitting that strategic plan with some of those tools that are available and clearly the world is not flat. Anyone who just says "Well, I did this on another scheme and let us just do it again" I think is missing the point. You've got to look at the key characteristics of where you are and what you want to achieve. Many sponsors have a different long-term plan and many would probably be happy with self-sufficiency as opposed to buy-out. I think that is probably realistic given that if you look at the buy-out market there is not enough capacity in each of the years, as it exists, so clearly, if we did get to yield reversion and everyone trying to buy-out, that might be a bit of a challenge for us. So maybe that holding harbour of self-sufficiency might a good place to be. We saw it from the survey results, those that have done some LDI or some hedging are in happy land because they have probably seen most of the shocks taken out the system. Those that didn't do it probably do have that regret risk. The big question is if you haven't done it, should you do it now? Again, I think that is the point of could you deal with a reduction in yield that would make the position even worse than it is? Do you want to deal with that position or would you prefer to accept that, to a degree, you might be locking in a little bit of that liability, but at the expense of a bit more predictability going forward. I think they are the sort of discussions that people need to have and really trustees are key in a lot of this. Certainly key in the liability management exercises because to an extent it grinds with the trustees' view that they are protecting members' interests and sometimes feel aggrieved that they are being asked to consider some of the liability management exercises but actually, there are a lot of times when it is in the members' interests to go through one of these exercises and they might be a lot better off financially if they do not have a spouse or have shortened life-expectancy than forcing a very rigid defined benefit entitlement on them. Don't always assume they are bad news.

Ben: I absolutely agree with that, Wayne, and I think they key is not making any assumptions about what the other party might think. I think one trustee board that I have been involved with where you might have seen them as very conservative trustees, or actually they are just being conservative to put themselves in a position where they could start helping out with de-risking etc. But because that had been going on for a number of years, the employers started to make certain assumptions, and actually there is no substitute for getting everyone in a room and saying "Actually, what's the plan here…"

James Double: Yes, the role of the independent trustee within this is really to help shape the strategy discussions, it's not particularly to be led by advisors we've been there and done if before so we can have that collaboration with the employer and get… work with the advisors to get everyone on the same page and help educate as well. We find lay trustees really look to us in some instances to say you know have you seen this before? Has it worked well for you? What lessons have been learned?

Wayne: Yeah those war stories and making sure you don't make the mistake you make the first time you do anything whether that's an extension on your house or entering into LDI (liability-driven investment) are really key things here.

James: And the ability to challenge advisors. They might not like that in certain instances but I think any good trustee board needs to challenge their advisors and get the most efficient way of getting to the solution and the best way of getting there really and we get to see through all our experiences and all of the trustee boards we sit on all those new ideas that are coming to the market whereas individual lay trustees who sit on one particular board might not see that you know they've got a narrow choice of advisors that they work with. When you see things like new investments coming down to being open to smaller schemes we may have implemented that on other schemes and we could perhaps broach that with the advisors say "Okay might this work, might that work?" and help shape that discussion and also when you get into buy ins and buy outs you really, and particularly if you're a smaller scheme, if you can take a story to the insurer and prove to them actually we can transact this then you would be in a much better position to get competition in the quotes for a start and engagement from this advisors and proving that you've done it before will help in those discussions.

Christopher Stiles: Okay. So let's move on and consider what some of the possible impediments are to de-risking and I think the way we'll structure this is that I'll obviously be an impediment and then James will explain how I am to be overcome. Now, it may be that the main impediment to de-risking may appear to be cost and clearly if you see de-risking primarily in terms of buy out with an insurance company then that's understandable, most schemes are not in a position to achieve that without a cash injection from the sponsor. The survey results which Ben talked through earlier do indeed show that many sponsors are unwilling or unable to provide such a cash injection although interestingly there are many for which that is not seen as the main impediment. The solution to that, again and I make no apologies for repeating a theme which is running through this entire presentation, is the trustees and the sponsors working together to understand one and other. Trustees and sponsors' interests are not always in perfect alignment when it comes to running of a pension scheme, but I think we can all agree that everybody wants member benefits to be paid as they fall due and the sponsors business to thrive. Both of those are legitimate considerations to be taken into account when developing any plan and as soon as you know what it is you want to achieve then you can plan how to achieve it. But importantly, and we'll come on to this in a moment, not all de-risking requires a cash injection from the sponsor. Cost isn't the only potential impediment, another one which has been flagged up is a lack of knowledge. Many of these options are complex financial instruments and they will require trustees to take professional advice and the solution to that clearly is to have good quality commercial advisors in position from an early stage in order to assist the trustees. So let's challenge the preconception that de-risking necessarily requires cash.

Well, of course, the sponsor may be willing to part with cash, as we've seen from the survey, if it's part of a strategy. A request from trustees to the sponsor to provide a blank cheque is unlikely to be a fruitful exercise but as part of a strategic journey that's another matter. So from a sponsor's perspective if step one was to close the scheme to future accrual, step two naturally is to look to de-risking. The trustees need to understand what the employer's level of risk tolerance is. They also need to be mindful of what other concerns and legitimate interests the employer may be needing to address. So the employer may not want to set its technical provisions assumption by reference to achieving buy-out, but might agree to a secondary funding objective which we see increasingly in practice. They may be concerned about overfunding the scheme and a surplus being trapped within it in which case contributions can be diverted into escrow accounts. So there are solutions to be found to most issues through a conversation. Most importantly it's quite possible that buy-out may not be realistic for this scheme at any given time, but that doesn't mean that the scheme can't de-risk and James is going to talk a little bit more about de-risking on the investment side.

James: Thank you Chris.

I suppose when you talk to employers and talk about de-risking the first impression may be "Oh you're going to move all out equities or gross assets and move a large chunk of them into maybe gilts and bonds and those which you know help protect the liabilities". I think the first stage in any de-risking of investments or any long term plan on de-risking strategy is to sit down with the employer and actually understand what are the risks faced by this scheme and you know what's our current asset allocation and can we do something a bit more efficient with that. Which doesn't necessarily mean let's reduce the likely investment returns on our assets. You can do quite a lot specifically with LDI investments that are much more efficient than those gilts and bonds that you may hold, to get better protection on interest rates and inflation but also retain the investment returns you want to get on your gross assets. So have that sensible grown up conversation with the employer, understand the risks of both the trustees and the employer and say "look you know this is something simple we can do, we're not saying you know our investment returns are gonna go down X% because you know we want more certainty", but you can do an initial step and say "Okay if we can get more efficient here then that reduces down side risks you have" and then there could be a longer term plan there to gradually increase the hedging on interest rates and inflation over time to reduce those funding shocks.

So we talked about LDI being on the matching asset side about something to do to de-risk. On the gross assets side there's been quite a shift from equities to diversified gross funds over the last few years. Starting to see question marks in the last year or so about whether they're going to produce the returns that are required and now there's other assets out there, liquid type assets, that are getting more accessible to the smaller end of schemes, things like direct lending. They again are options to help reduce the volatility in your gross asset returns.

So once you've got a structure round what your asset allocation is and perhaps how that might change over time if you take market gains and reduce the risks you're taking, you can perhaps think about liability management exercises to go in with this plan. Are they feasible?  For some smaller schemes they may not be, you know the costs associated with getting the advice you know providing independent financial advice to members if necessary, could out weight the potential costs savings. But you can do that work to see whether it would be something that would work for you and that could be a tool that's used to help reduce liabilities.

Then finally buy-in buy-out or longevity swaps. If you're going, if the long term aim is, to buy out then perhaps longevity swaps aren't the way forward. It may be more efficient to go straight to buy-in of pensioners. But schemes that are looking to be self-sufficient and maybe at the larger end, longevity swaps may be useful. They're you know something to sit down with, with the employers, plan from day one about what you're long term plan is.

Wyane: I guess that's leads us on to how would you get to sort of that end nirvana if buying-out pension schemes is nirvana, I guess part of that route really brings us to benefit specifications, because no-one can secure those liabilities without a good benefit specification, that's not the scheme booklet, that's a little bit more. I think we are going to touch on some of the practical challenges around data but also how you align that with the benefit specification.

So I guess what is clean data? I think everyone describes their data as being clean. I see lots of schemes where it's a bit like buying a fridge, you get that A rating and you think you are delighted with it only to find out that there's an A+++ version that you really needed. So really focussing on what proper data is and really what the insurers are using that data for is pretty key here. So don't enter into this project thinking you're probably there because most schemes are often surprised at how many things are missing. Also taking that in parallel with the benefit specification, to figure out whether the benefits have been administered in the way that you should have been administering them can be challenge sometimes to getting things tidied up. So if you get the trustees who engage with insurers in advance and will get better prices when you can demonstrate that you've gone through this process because they are making fewer assumptions around what risks they are taking on.

Sadly size does matter, bigger schemes with bigger names, for some reason insurers are attracted to names sometimes, can get better terms than a small scheme that's just got a small liability that they want to secure. The way round that sometimes is for them to be packaged up with others or if it is part of a wider group you might have one smaller DB scheme with others to follow. You can use the small one as seed to develop the relationship with that insurer.

I guess one of the practical challenges that we see is that most businesses reward people for what happens in a year, a financial year, an assessment year whatever you want to call it for themselves. Sometimes insurers get hungrier for business and sometimes they get too much business, so picking your time to transact can be quite key in all of this, but if you are good engaged partner with them that can transact with a bit of flexibility then you're going to match yourself up a lot better than if you don't.

So we touched maybe on a couple of these points already that high common and conditional status scores do not mean that benefits have been calculated in the way they should have been. I've seen it too many times where people say I didn't realise I had that benefit or we had to do that. Which leads onto a whole different discussion and in many cases will slow down or stop the process of securing the scheme with the insurance company. If I was an insurer, you know I would want to take comfort of the benefits being properly administered. So it is rightly something that they should expect from trustees and the better you can do it the more independently and objectively you can put that forward, the more likely you are to be considered transaction ready. Don't forget that there's loads of other stuff that normally doesn't really matter until a member passes away or leaves the scheme but will be important for the insurers to firm up their pricing. So spous's dates of birth, those sorts of things are really key, and many schemes are pretty poor in this area. So, again you are really talking about, there's an extra A+++ rating that we need to get to rather than just being A on that scale.

Christopher: Okay so let's talk a bit some of the issues when it comes to putting together a benefits specification and why this matters. Well why it matters is that the trustees' obligation is to provide the benefits which are set out in the rules of scheme, not the benefits as per the member booklet or the administration manual. But an insurer will still need those rules to be codified and that's the function of the benefits specification. There are a number of issues with that so it may be that the rules are unclear and indeed experience of talking to administrators it's quite common to say that the rules themselves are not sufficiently detailed for them to know exactly how to administer the scheme, they have to supplement it with administration practices, so those need to be codified into the benefit specification. It may be that not all aspects of the benefit design are apparent from the rules because pension scheme benefits are also affected by overriding legislation in areas such as increases, contracted out benefits etc. and how the scheme interprets and applies those obligations again needs to be set out clearly. We have experience of schemes which have historic administration practices that actually go beyond the strict legal requirements but members are still accustomed to receiving benefits that have been determined in that way and when they move to transact with an insurer they wanted that to be taken into account. So that all needs to be written down. The more negative flipside of that is that there are situations where the administration of the plan is simply inconsistent with the rules and that is something if it has occurred that you want to find out sooner rather than later. I certainly had an experience of a scheme which was looking to buy-out and as part of the insurer's due diligence it became apparent that the way it was applying an aspect of the benefit design was incorrect and this materially affected its liabilities and put the buy-out out of reach and that's the sort of thing you don't want be discovering during the heat of a transaction. So this all goes back to the point of planning ahead and being transaction ready.

Another common misperception is that it's only the most recent consolidation of the rules which are relevant, so people tend to refer to the most recent consolidation and any subsequent amendments. But typically they will include grandfathering provisions so that people who had already left service by that time continue to be governed by the older deeds and so it becomes even more essential to review all the deeds and codify the results in a single document which is the benefit specification and the consequences of mistakes in any of this is of course overpayments and underpayments to members.

Now that might all sound like a lot of work and indeed in certain circumstances it can be so is it worth it? Well clearly if you are targeting buy-out yes as I said it is as well to be prepared and to have the work done in advance to avoid problems later. Even for schemes that are not in a position to buy-out however it still has some advantages as a risk management tool. It's generally regarded as wise to avoid lifting lids of cans of worms and that's understandable certainly in the context of pension schemes. With any pension scheme that has any degree of history I think that it's a safe bet that if you go actively looking for problems you are likely to find some. But there's a difference between actively looking for problems and making sure you understand your benefit design which is a core part of trustee's duties and good governance. So although trustees may have protection against liability in the form of either an indemnity from the sponsor or insurance, clearly the best form of protection is simply to pay the right benefits in the first place and the fact that you haven't discovered a problem doesn't mean that that problem will never come back to bite you it merely means that it is like to come out at a less convenient time at which it could be addressed and therefore being prepared has clear advantages.

Ben: I am going to run through quite quickly actually at this stage the practical issues and pitfalls because I want to give Wayne and James a little bit of time to talk about how the market is looking in 2017 and also to give a bit of time for questions.

Just really to build out on some of the points that Chris just made there. The importance of resolving these issues at the outset, it simply costs you more money if you don't, it is so much harder to negotiate pricing once it has been agreed. If exclusivity has been granted to a preferred insurer at that stage you are all but locked in, trying to negotiate the price then is like trying to push back the tide. So it is very important to address these problems at an early stage and another practical issue that often crops up later in the piece than you would expect is trustee protection. You need to make sure the trustees are off the hook if we are buying out the scheme or if we are doing a full scale buy in then you would be amazed how many times that gets put to the back of the list and then all of a sudden trustee raises its hand and say hang on actually what happens the next day and just moving onto the next slide.

In practical issues for the pension scheme itself and for administrators and in particular if its in-house administration making sure that you have done all of your due diligence, making sure that looked under every desk and in every back of cupboard that you can possibly find and cleared those out. Because otherwise you might find some nasty surprises in there, you might find a large supply of data coming through after you've agreed your pricing and after you've agreed exclusivity and nobody wants that happening. So we've certainly had experience of that in practice where a lot of material can come out at the last minute. It is a bit of a boy scouts' motto "always be prepared" but when it comes to buy-ins and buy-outs it couldn't be more true.

James: I would certainly concur with that and the some practical experiences we've seen where you get an initial price from an insurer and whilst you are winding the scheme up and tidying all the data up then you are expecting this final premium but you don't quite know that that amount is and if you can get a lot of the work done upfront then you won't get that surprise later down the line.

Okay so briefly a piece on de-risking in 2017 and into the future. I think we see schemes in rather simplistically two camps. Those that have done significant interest rate hedging and they, even with gilt yields falling, will have seen perhaps their gross assets perform rather well since Brexit and have the ability to look into buying in the pensioners or buying out the full assets and those that haven't been so well protected against gilt yield falls, actually we're now starting to see more engagement with employers saying look we have been ploughing money into this scheme without our funding levels increasing, so we really need to start considering the long term strategy with that.

The buy-out market, it's interesting yesterday I saw an article that said last year there was £10 billion of buy-in buy-out activity last year for the third year in a row and I can see that continuing into the future. I think the challenge is when the insurance market starts to not have the capacity to take on the requirements for all the pensions' schemes out there.

Smaller schemes, we've had challenges ourselves on some of our schemes to get competition in pricing, we may have to go to an exclusive insurer to just get your foot in the door. Would we be able to group these schemes together, there's challenges there certainly, but there's definitely products out there. Make sure you are transaction ready because insurers are busy, they are the ones calling the shots, if you want them to be interested in your scheme you need to create that story for them.

Ben: Yeah and I think it's much more a conversation between the insurer and the trustee than a classic insurance model, it's very much a work together and make sure that you've got all the information on the table before you start.

James: Just remember that things don't get better the longer you leave them, so even if you think you're not going buy out until 15 or 20 years' time, once the office has moved three or four times and all those important documents that you need at the very end, which is a fairly common theme, try and grab them now and digitise them in some way.

Ian: The crumbling microfiche at the back of the filing cabinet that's a particular excitement…

So we've just got a couple of minutes now just for a couple of questions.

The first one, and this really just goes to the theme that Chris was pointing out about communication. As trustees what would you do if your employers are just not engaging on the issues, are there any soft tactics or anything a little bit more aggressive that one can do to try and encourage employers to get into the room?

Wayne: Yeah I mean I think my generally view on any relationship especially one that's financial, be that marriage or having a DB pension scheme together, it's very similar in many respects. It is not a good negotiation to start off by kicking people in the shins… it's not something that's going to end up well I don't think. So I think you do have to start off with the benefits of what you're doing and why you're doing it. Often cost is seen as an issue and I think you just need to say, we're discharging it. You're going to need to do it at some point, we are going to do it as efficiently as we can and the sooner we do it, probably the more efficient it will be to get some of the foundations in place. You will however get employers and I am thankful that it is actually a very small population of employers who are unwilling to engage. At that time if they are choosing to do that then may be you do have to be a little bit tougher but keep that in reserve because once you've pulled out the loaded gun it is very difficult to rebuild that relationship afterwards.

Ian: And we'll just have one final question.

It's just talking around the benefit spec and asking whether this is going to provide a standardised way which might support consolidation of DB funds into some sort of super fund which is very much a buzz topic coming out of things like the Green Paper.

Christopher: Yeah I think that's a very interesting point actually and certainly consolidation is something which is being actively looked at in the DWP Green Paper. It is something the Regulator is very interested in also, for small schemes in particular and there are a number of vehicles out there which will seek to provide that for DB schemes. I think the question that actually just underlines the point I was making was that benefit specification serves many purposes other than just preparing the scheme for buy-out clearly an understanding of the benefit design of the design is necessary for any such process as it is necessary for running the scheme on according to the status quo as it is necessary for preparing to buy it out with an insurer. So yeah I think it's a good point, I think we are some way off. A standardised product in the line that you introduce to Ian but yeah I think it's a good point.

Ian: I the nearest the insurers that like certain specs in a certain way but you know benefit specs with have some similarities but there will be quite a lot of differences as well.

Christopher: We certainly see in practice this huge amount of variety in approach. I've seen some which are very concise, I've seen some which are very long, some are very text based, some are based on spreadsheets so there is certainly a wide range of different approaches of taking to them.

Ian: Perfect, well I would just like to thank our speakers, thank you very much for an absolutely fascinating presentation. Just to mention before we finish, there will be a feedback question that pops up on your screen. If you can provide any feedback that would be really for us shaping future webinars and providing the sort of information that you are most interested in. There's also the download tab where you will be able to get some more information around the webinar and also we will be putting in a recording of the webinar along with the transcript on our website and what we are going to is let you know when that happens. So if you have got any colleagues that are interested but couldn't make it today then they will be able to watch or read in their own time.

So that's all from all of us, so thank you very much and hope to see you very soon at another Gowling WLG webinar soon.

All: Thank you.

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