Defined Benefit Issues

How do you identify the right set of solutions for your Defined Benefit (DB) scheme? There are always areas which might deliver improvements in the scheme or costs of maintaining benefits, including:

a scheme redesign,
enabling employees to optimise plan value,
rebuilding the funding position,
creating greater scheme management efficiencies and
modifying asset and investment policies.

Working with some of the largest financial services organisations in the UK, Creative Benefits specialise in sourcing the right solutions for your needs to ensure a “best fit” whatever the circumstances. Through our innovative approach, we shape solutions that can realise both risk and cost reduction benefits, whilst balancing the needs of trustees and the employer’s business objectives.

Many employers have made changes to future pension provision in response to the changing landscape for DB schemes. The majority of schemes are now closed to new joiners but more companies are taking the next step by changing future benefit accrual for existing employees.

We will work with you to determine the right approach to design, funding, investing, governing and employee engagement.

We know that once accrual ceases the employer’s focus shifts quickly towards solutions aimed at eventual windup and the trustees towards scheme efficiency. In both cases, the argument for purchasing services separately from different suppliers loses its validity. Each service provider has its own way of working and priorities – which are not designed to facilitate the actions taken by another provider increasing the risk of a disjointed service with increased costs.

However both costs and services can be streamlined by purchasing "joined up" services from a single provider. In our experience this reduces the running costs of the scheme while providing more appropriate services. We are happy to recommend the “fully bundled basis” of a specialist insurer (a number have recently invested heavily and re-launched their DB propositions) providing core services of investment management, administration, actuarial and accounting.

We interface between the trustees and core service provider, offering investment advice, plan management, consultancy and communication services. When investigating this option we would take into account the nature of your business, the composition of your workforce and your goals for benefit adequacy, competitiveness and cost management.

Creative Benefits can help you implement a pension solution that combines efficient low cost administration with the latest industry knowledge and investment best practice.

The role of the bundled provider is essentially that of product manufacturer and service provider and it is our job to deliver consultancy and investment advice. Our clients are looked after by a team headed up by an experienced client manager and we structure our services around your needs and, where appropriate, within a fixed fee. Typically these services include:-

Acting as pensions manager – each client has a dedicated scheme manager who co-ordinates and regularly reviews all your professional advisers, monitors costs, project manages operations and business plan objectives.
Acting as secretary to the trustees -arranging and managing meetings, setting agendas, distributing papers, preparing minutes and working in close liaison with the chairman of trustees to ensure good governance.
Reviewing of new legislation - to keep all updated and proactive advice on any regulatory or legislative changes.
Periodically reviewing benefit provision - to ensure the employer’s objectives are maintained and update you on market developments and help monitor performance of your investment portfolio.
Acting as a help desk – deal with all pension related queries emanating from the employer, trustees or individual members as appropriate.
Communicating benefits - cutting-edge technology solutions that educate members and trustees alike and take the administrative burden away from employers.

Since 2005 trustees have been required to increase their understanding of and time commitment to scheme governance. We expect good governance to demonstrate effective reporting and controls to minimise risk and improve efficiency and when carried out properly, governance is a valuable risk management tool which should be efficient and add noticeable value. The key areas of governance that trustees should consider are:

Knowledge and understanding
Monitoring the employer covenant
Record keeping and administration
Investment strategy and performance
Internal controls

Furthermore, recent guidance from the Pensions Regulator gives trustees until the end of 2012 to assess their membership data and take action to correct any deficiencies. By using the services of a recommended specialist insurer on a bundled basis a scheme’s data will automatically receive an appropriate data cleanse.

We provide and facilitate trustee training to ensure trustees develop and maintain the right skills to operate their scheme. We organise with our clients a forward looking business plan that will underpin their whole approach to governance.

Setting an appropriate investment strategy is a key decision for trustees and arguably the greatest risk facing funds!

Following the relative calm of the 1990’s, the “perfect storm” of negative equity returns and low interest rates over the last decade (causing significant scheme deficits), we have witnessed a fundamental review of the way in which pension funds assess and frame their investment strategy. The mainly asset based approach has been largely abandoned to one that is more “liability conscious” giving equal measure to assets and liabilities. We have also seen a reduction in the allocation to domestic asset classes as schemes diversify and invest more in international markets and wider asset classes such as infrastructure commodities and currencies.

We welcome these changes; it is important for trustees and scheme sponsors to hedge the risk inherent in DB liabilities and diversify exposure to the markets.

In relation to changes in future benefit accrual (usually to money purchase) this typically only affects an employee’s future pension benefits rather than the scheme liabilities. This means a large DB legacy issue still remains, requiring careful and active management of the cost and uncertainties attaching to them. What has become more apparent in recent years is the recognition that a final salary pension fund is a complex financial machine - for many employers and trustees the reality of just how much risk there is “under the bonnet” has been a surprise- it is essential that those involved in the decision making process get to grips with the fundamentals.

We can help you tailor an optimal investment solution that considers the funding requirements of your scheme based on current and future liabilities.

A DB scheme can significantly affect earnings, cash flow and the balance sheet. Whether you are a sponsor seeking to exit from your defined benefit scheme liabilities or a trustee undertaking a de-risking exercise, in the right circumstances, deficit removal strategies targeted at certain member categories can make a positive contribution. We have considerable experience of helping employers implement communication and advice programmes aimed at members to reduce the scheme's long-term liabilities and its impact on the company balanced sheet.

We provide a comprehensive approach obtaining the necessary analytical tools and facilitating a client’s access to a full spectrum of investment solutions, typically available to only the largest of pension funds.

Access to the specialist insurer’s sophisticated tools, research and thinking combined with our consultancy services mean a tailored solution that will balance your company’s retirement risks and costs with plan objectives and opportunities. For example, by utilising their asset allocation support services we will analyse the distribution of the scheme’s liabilities, overlay the trustee’s attitude to risk for banded liability time periods and then advise the trustees on the appropriate asset allocation/fund selection to meet the stated investment objectives.

We know many of you will be concerned about the efficiency of your scheme’s investments and their ability to fund liabilities now and in the future. We encourage you to carry out a “portfolio efficiency check” for potentially enhancing returns with no additional risk or alternatively achieving the same returns but with considerably less risk. This approach considers the scheme’s unique position in terms of its maturity, current funding level and expected cash flows over the coming years. We have a wealth of experience in this area and can help you progress this.

Overall, our goal is to come up with solutions that are right for your unique situation. We will look to source exactly the products and services that are needed and aim to optimise your scheme’s portfolio construction to progress strategies with an asset mix closely aligned to the liability needs of the scheme, rather than a pure asset strategy approach –and all of this will be underpinned by a good governance structure.