A duty of trust
Update on regulatory activity and funding principles


David Hannant
Risk & Funding
June 2009
All schemes must perform a triennial valuation
The process for trustees takes up to 15 months
          …ROUND 1…         ...
Robustness versus flexibility

Technical provisions:
• must be robust;
• need to reflect the situation as it really is, no...
Employer covenant

• Employers legal obligation and willingness
  to support the scheme

• Employer stands behind payments...
Assumptions and employer covenant

Strong          Some                  High

         Covenant         Risk level of
   ...
TPs + covenant = self-sufficiency
 Technical provisions

       Assets             RP


                                  ...
TPs + covenant = self-sufficiency
 Technical provisions

       Assets                   RP


                            ...
TPs + covenant = self-sufficiency
 Technical provisions

       Assets                       RP


                        ...
What does this look like in figures?
Past service
                                       Best
 Basis                      ...
Assessing covenant

• Trustees and employers need to work together
• Objective independent review is often helpful

Covena...
Flexibility in recovery plans

• Once there is agreement on prudent technical provisions, the
  recovery plan can be agree...
Example of a flexible recovery plan
• Deficit = £14 million
• Company cash-constrained;
   • reasonable expectations of re...
In summary…

• Scheme funding regime flexible enough to cope in the downturn

• Technical provisions must be robust and ne...
Introducing the case study

Stokesworth Holdings Limited
(and its subsidiaries)

and
Stokesworth Retirement Benefits Scheme
The group
                             Mega Industries Inc



                                          100%


      Other...
Stokesworth Retirement Benefits Scheme
• The scheme operates on a conventional final salary basis
• Closed to new entrants...
Stokesworth Retirement Benefits Scheme
Liabilities by membership – 30/09/05 Part 3 valuation




             £12,450,000
...
De-risking solutions suggested

• Buyout of pensioner members’ liabilities with an insurer

• Closure of the scheme to fut...
Uninsured buyout proposal

• Newco substituted for                            Investor

  existing employers
             ...
Buyout vs. Buy-in

• Buyout is where an insurance company takes on assets and
  liabilities of the defined benefit scheme
...
Breakout

• What are the advantages/risks of these potential solutions?

• What is the trustees’ role if any of these de-r...
General discussion / Q & A
Thank you
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The Pensions Regulator - A duty of trust - Update on regulatory activity and funding principles

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Presentation from David Hannant, Pensions Regulator to the TUC Member Trustee Network Conference 2009

Published in: Business, Economy & Finance
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The Pensions Regulator - A duty of trust - Update on regulatory activity and funding principles

  1. 1. A duty of trust Update on regulatory activity and funding principles David Hannant Risk & Funding June 2009
  2. 2. All schemes must perform a triennial valuation The process for trustees takes up to 15 months …ROUND 1… ROUND 2… Tranche 1 Recovery Tranche 1 Recovery schemes Plans schemes Plans 22/9/05 – 21/9/06 22/9/08 – 21/9/09 Dec 06 – Dec 07 Dec 09 – Dec 10 Tranche 2 Tranche 2 Recovery schemes schemes Plans 22/9/08 – 21/9/09 22/9/06 – 21/9/07 Dec 07 – Dec 08 Tranche 3 schemes Recovery 22/9/07 – 21/9/08 Plans Dec 08 – Dec 09 …DEALT WITH… ...CURRENT… …FUTURE… Sept 05 Sept 06 Sept 07 Sept 08 Sept 09 Sept 10
  3. 3. Robustness versus flexibility Technical provisions: • must be robust; • need to reflect the situation as it really is, not as we may like it to be. However: Recovery plans can be flexible if needed.
  4. 4. Employer covenant • Employers legal obligation and willingness to support the scheme • Employer stands behind payments to cover ongoing payments; deficit repair; appropriate scheme expenses and underperformance • For ongoing funding employer covenant provides security if actual experience is worse than assumed
  5. 5. Assumptions and employer covenant Strong Some High Covenant Risk level of assumptions Prudence Weak Little or Low none
  6. 6. TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding
  7. 7. TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding
  8. 8. TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding
  9. 9. What does this look like in figures? Past service Best Basis Buyout est. s179 FRS17 Scheme funding Assets 38.5 38.5 38.5 38.5 Liabilities 58.5 37.9 43.9 41.9 (Deficit) (20.0) 0.6 (5.4) (3.4) ? Funding level 60% 102% 88% 92% All figures are in £million
  10. 10. Assessing covenant • Trustees and employers need to work together • Objective independent review is often helpful Covenant assessment should answer the questions: • effect of corporate structure and legal obligations to the scheme • employers ability to meet ongoing demands as they fall due • the employers ability to stand behind any adverse experience in an on-going situation, including the investment risk taken by the scheme • scheme’s position on insolvency • options for alternative security, shape of payments
  11. 11. Flexibility in recovery plans • Once there is agreement on prudent technical provisions, the recovery plan can be agreed • Recovery plans should reflect what is possible and reasonably affordable… but members should not be disadvantaged by terms of plan • However, there is a significant degree of flexibility
  12. 12. Example of a flexible recovery plan • Deficit = £14 million • Company cash-constrained; • reasonable expectations of recovery in year 4. • Payments £1 million yrs 1-4 • Payments £1.5 million yrs 5-8 • Payments £2 million yrs 9-10 In addition: If company reaches certain triggers e.g. profit of over £1 million a year it will pay 25% profit a year to pension scheme.
  13. 13. In summary… • Scheme funding regime flexible enough to cope in the downturn • Technical provisions must be robust and need to reflect the situation as it really is • Importance of the employer covenant • Recovery plans should reflect what is possible and reasonably affordable
  14. 14. Introducing the case study Stokesworth Holdings Limited (and its subsidiaries) and Stokesworth Retirement Benefits Scheme
  15. 15. The group Mega Industries Inc 100% Other MI Stokesworth Other MI subsidiary Holdings Limited subsidiary Principal employer 100% 100% Stokesworth Stokesworth Solutions Limited Designs Limited Participating employer Participating employer
  16. 16. Stokesworth Retirement Benefits Scheme • The scheme operates on a conventional final salary basis • Closed to new entrants in 2003 • Following a review in 2006, future accrual was reduced from 1/60 to 1/80 • Employee contributions of 6% of pay • Total membership - 591 – Active - 216 – Deferred - 232 – Pensioners - 143 • Scheme assets invested 60% in equities and 40% in bonds
  17. 17. Stokesworth Retirement Benefits Scheme Liabilities by membership – 30/09/05 Part 3 valuation £12,450,000 £16,000,000 Active Deferred Pensioner £13,050,000
  18. 18. De-risking solutions suggested • Buyout of pensioner members’ liabilities with an insurer • Closure of the scheme to future accrual • Transfer incentive exercise aimed at deferred members • Pension scheme transferred to a pension specialist sponsoring employer (uninsured buyout)
  19. 19. Uninsured buyout proposal • Newco substituted for Investor existing employers Profit • Newco has some cash but no business Newco Employers £ • Any surplus generated from scheme returned to Newco and then as profits to investor Scheme
  20. 20. Buyout vs. Buy-in • Buyout is where an insurance company takes on assets and liabilities of the defined benefit scheme • Buy-in is where the scheme buys an insurance policy in respect of members for whom the scheme retains the liabilities. The insurance policy provides a stream of income, just like other scheme investments.
  21. 21. Breakout • What are the advantages/risks of these potential solutions? • What is the trustees’ role if any of these de-risking solutions are taken forward? • What additional information should the trustees look to obtain?
  22. 22. General discussion / Q & A
  23. 23. Thank you

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