Richard Jones, Managing Director at Punter Southall
Defined benefit pension schemes are faced with a myriad of ongoing risks and challenges, with the last year proving to be an especially bumpy time for the market.
The effects of last year's liability-driven investment (LDI) crisis were not consistent across schemes and they have lasting ramifications. Some schemes emerged from the turmoil better funded and closer to their endgames. Yet many schemes fared worse and must revisit liquidity management and their ability to react quickly in times of market stress.
The new normal market environment is volatile and full of challenges and uncertainty. Alongside choppy financial markets, corporate health threatens the affordability of these legacy benefits, as some companies struggle to keep their heads above water. With this backdrop, schemes should be looking at additional protection to increase their capacity to withstand difficulties.
"Given the demand for de-risking in the market, not all schemes will be able to complete this journey and members could suffer loss. Some schemes will look at the ongoing volatility and understand that some market conditions could be riskier than they thought. As a result, hedging has become more important than before," says Richard Jones, Managing Director at Punter Southall.
A long-term solution for today's challenges
The good news is that the market has responded with solutions to meet the needs of the everchanging and volatile defined benefit pensions landscape. Leveraging a 35-year heritage of pushing at the boundaries of innovation and responding to the ever-evolving needs of the financial services market, Punter Southall developed a capital-backed journey plan (CBJP) that offers schemes a new means of meeting their long-term objectives.
"Pension schemes can become unaffordable for companies and members can lose benefits. We need solutions to fix these ongoing problems and ensure that members get the benefits they were promised paid in full and not the reduced benefits of the Pension Protection Fund," says Jones.
Schemes benefit from a protective capital wrapper that creates a buffer between the scheme and the employer to absorb downside risks, thereby providing greater cost certainty to sponsors. For members, there is a radical improvement in the security of pension benefits.
"The price is roughly around what sponsors will pay in if they carry on running their pension scheme. It is a significant discount to buyout and it is designed to bridge them from where they are today to an insurance company buyout in an extremely low-risk way," he adds.
While the underlying risks, such as poor investment returns, member longevity and changes in buyout pricing for example, have not changed, financial markets, inflation, and gilt yield volatility have all become the new normal. Trustees, who often have limited ability to accelerate the path to endgame, should be looking for opportunities to de-risk.
"There are still many financial risks for the sponsor and members, even for schemes starting from a better point. For some, it might mean that they can adopt a less risky investment strategy, but that is not quite the same as saying there cannot be significant challenges," says Jones.
A bumpy and oftentimes unclear road to buyout requires a fresh approach to today's new challenges. Experience and the ability to adapt to constantly shifting needs is key to meeting those challenges. But even as the world around looks even more uncertain, there are things that do endure; the ethos of Punter Southall has remained the same over almost four decades of market evolution: Doing right by the members and meeting the needs of schemes.
