This document summarizes options for reducing pension scheme risk presented by François Barker at a pensions conference. It outlines a suite of options including closing accrual to future benefits, reducing investment risk through options like buy-ins or switching to less volatile assets, reducing liabilities through enhanced transfer values or liability-hedging swaps, and using non-cash assets like property or loans to fund pension obligations while preserving cash. It notes legal, financial, and practical issues to navigate for each approach, as well as other upcoming pension changes for schemes to consider.

1. Scheme De-Risking: the Finance Director’s Cut
CBI Pensions Conference 9 September 2010
François Barker
International Department Head, Pensions, Hammonds LLP

2. A Suite of Practical Options
 Changing / closing off accrual
 Reducing investment risk
 Reducing liabilities
 Using non cash assets
 The main issues to navigate round
 Legal / financial implications

3. Changing / Closing off Accrual
Aim: Stop further build up of liabilities + curtailment
gain for accounting
Issues:
 Employee consultation - 30 to 90 days
 Managing Section 75 risks
 Contractual rights of employees
 Scheme amendment powers / incentivised opt out
 Getting / keeping trustees onside
 Only tackles future risk

4. Reducing Investment Risk
Aim: Minimise risk / volatility + preserve return expectations
to minimise impact on cash / P + L
Issues:
 Buy in / buy out options
 Cross-subsidy
 Provider covenant vs sponsor covenant
 Funding strain and premium: use non cash assets?
 “Synthetic" assets - better diversification, returns and liability hedging
 Review of buy in / buy out contracts and investment agreements

5. Reducing Liabilities
Aim: Reduce absolute size of liabilities / gearing +
offer choices to former / legacy employees
Issues:
 Enhanced Transfer Values
 Need cash injection so impact on accounts
 But may be other options
 Pension Increase Swaps
 Don’t need cash but move to CPI may make unnecessary?
 Legal risks: misselling and Pensions Regulator, scheme rules, trustee
engagement and Pensions Act 1995

6. Non Cash Assets
Aim: Conserve cash / unlock value of undervalued
assets / longer recovery plans
Issues:
 Parent company guarantees and charges already well used
 Now focus on intermediate funding vehicles
 Company assets to produce income flow for pension scheme
 Wide range of assets used (real property, IP, inter-company loans,
physical assets)
 Funding and security advantages – a genuine “win win”
 Multiple legal, accounting, tax and valuation issues

7. And don’t forget
 RPI is likely to become CPI
 Act now to preserve the ability to extract scheme surplus
 Amend conflicts policies to addess the Bribery Act 2010
 Transitional Finance Act 2004 rules expire April 2011
 Default retirement age of 65 disappears April 2011
 DC contracting out disappears April 2012

8. Scheme De-Risking: the Finance Director’s Cut
CBI Pensions Conference 9 September 2010
François Barker
International Department Head, Pensions, Hammonds LLP