Thinking like an insurer: How DB schemes can prepare for buyout
17 May 2023
Our DB Forum discussed how to get your scheme’s house in order so you can go to buyout. Meanwhile, the Code of Practice is just around the corner, and member communication is a top priority.
At our DB Forum in May, trustees gathered to hear about the impact of journey planning on asset allocation, the new Code of Practice, and communication challenges and opportunities.
On the first panel, a trustee, sponsoring employer, and an asset manager, discussed the importance of sponsors and trustees working closely together when preparing to move towards buy-in. The sponsor’s covenant is important in these transactions and their role can make a huge contribution to a transaction completing.
The sponsor said close partnering with trustees was an advantage for attractive insurers when we went to buy-in.
The panel also discussed how pension schemes need to start thinking like an insurer and look at things like interest rate management. There are a range of experiences with investment choice in the run-up to buyout. Investment choice has a big impact, with the asset manager pointing out that cashflow management is increasingly important in the run-up to buy-in.
The asset manager said since the LDI crisis, there is a question over whether gilts plus is the optimal way to align asset risk with liability risk. Some schemes have been left with a higher proportion of illiquid assets since they had to meet their collateral requirements with cash. The challenge for schemes is that having too many illiquid assets can make them less attractive to an insurer.
Several schemes are now in a better funding position since the rise of gilt yields, which has increased demand for insurance buyouts. The panel warned they may have to wait longer to get buyout now there is more demand for insurance buyouts and the buyers’ market has become a sellers’ market.
That has implications for pension schemes’ investment, and there is also a question over the right level of liquidity since last year’s LDI crisis. The sponsor pointed out that unexpected opportunities arise, and therefore it is important to have your house in order.
New Code of Practice
During the next session, we heard about the forthcoming Code of Practice, which consolidates The Pension Regulator’s 10 existing codes of practice and guidance into one and is designed to be modular to enable users to navigate easily between the different sections.
Two years after the regulator’s consultation, the new Code of Practice is expected to be published soon – it is a question of when now.
We heard how the Code is supposed to be useful for pension scheme and not generate unnecessary extra work. The ambition is to help build effective governance by pulling 10 codes into one – but much of its contents will be things that schemes should already be doing in terms of governance.
However, it was pointed out that it may lead to challenges for some schemes that are lagging others in governance, particularly smaller schemes. We also heard how the new Code will improve governance and leave schemes in a better place and be used as a regulatory stick for measuring governance.
The speaker said this is an opportunity to look at the fundamentals of good governance but also to help trustees ask more questions, suggesting that perhaps some have relied too much on their advisors.
Communication and engagement
During the third session, three pension schemes discussed the steps they have taken to improve communication with the aim of driving engagement among members.
Member satisfaction has been improved through refreshed brands and websites, as well as digital portals and personalised and segmented member communications, which help members make retirement and pensions decisions.
Pre-retirement courses, nudging and webinars also help – and a strong core service team is needed to provide them.
A challenge shared by all schemes is how to relay information to members and in what format. Keeping things simple is important, especially for complex funds. And the next big challenge for some is how to communicate with members who are vulnerable such as the elderly and those who have dementia or Alzheimer’s.