Sponsors want help to manage schemes approaching endgame scenarios
More than a decade of low interest rates, increasingly onerous regulations have added to the significant expense of operating a DB scheme for employees, making it an unattractive or even unviable operation.
Substantial rate increases over the past 18 months could have been a great opportunity to bring down employer costs but, given recent guidance and the themes outlined in its annual funding statement, it’s likely that the Pensions Regulator will promote faster de-risking as the priority. Trustees will be encouraged to use recent gains to increase the prudence around funding targets at the expense of reducing company contributions.
It is within this environment that we are seeing increasing demand from companies for a second pair of eyes – to keep a strong hand on the tiller of cost while specifically looking after the sponsor’s own interests.
For example, where schemes are still on the journey to buy-out, the pressure to de-risk investments instead of relying on company covenant to manage negative experience is increasing the length of journey and the company’s share of cost.
Be careful not to overdo it...
For many schemes, there is a very real risk of overfunding which means at the point of securing a transaction with an insurer, additional tax must be paid or there is ‘trapped’ surplus which can only be used to enhance member benefits.
As schemes reach buy-out, there are also company-specific factors that need to be carefully managed such as the risk of punitive accounting impacts, depending on the jurisdiction the company or its parent group reports in.
By helping to engage company stakeholders in the scheme’s journey, independent corporate advice can help directors form their own strategy on pensions and ensure that the company’s position is fully factored into the trustees’ thinking.
However, corporate advice is not just a safety catch for sponsors to ensure their needs and aims are met – a good company adviser can drive stronger scheme performance.
For example, it is becoming common to set up joint working groups with trustee and company representatives and advisers working together to deliver faster and more efficient decision-making when working towards an established common objective.
Corporate advice is evolving
Rather than increasing overall adviser spend, a good corporate adviser helps avoid duplication of work and increases efficiency through a stronger focus on project management and by clearly defining everyone’s role and responsibilities.
Moreover, where actuarial and administration resource is scarce, having access to two firms that understand the scheme can allow a more flexible approach to resourcing and speed up delivery.
A natural degree of competitive tension between advisers on the scheme will also help concentrate appropriate attention from the trustee adviser to again increase the pace of execution and help manage scheme running costs.
Whenever we see new regulation brought into the sector such as the upcoming funding code, we see and hear the problems of companies first-hand. Higher cost, more hurdles to jump over and extra potential roadblocks in the way of their ultimate strategy.
The evolution of corporate advice is giving sponsoring employers their voice back to look after current/former employees and determine their own journey to end-game.
Stuart Bradbury is head of corporate services at Broadstone
