The five biggest DB pensions challenges today

Transcription

1 Aon Hewitt Retirement and Investment The five biggest DB pensions challenges today and how to solve them Enter

2 What are the biggest challenges facing UK Defined Benefit (DB) schemes today? The DB pensions landscape is ever-changing. New legislation, volatile markets and changes in member expectations combine to create a challenging environment for sponsors and trustees alike. The five biggest challenges were identified as: In summer 2017, we asked DB schemes not just Aon clients, but the pensions industry as a whole what their biggest issues are; the main challenges that hinder their ability to deliver the best outcomes. This work builds on the 10 Biggest Administration Challenges we published last year, which identified the 10 biggest issues schemes struggle with in relation to administration. You can read more about this, and download the 10 challenges document, here. This year s research covers 190 scheme representatives: trustees, sponsors and some wearing both hats. Respondents were asked to choose their three biggest current DB challenges from a list of ten, or to supply their own free-text answers. If any of these challenges resonate with you, please read on for concrete actions you can take to address them. You can also get in touch to book a free review for your scheme. Diagnose your challenges and begin to explore how to tackle them. We believe that better outcomes are achievable for every pension scheme, irrespective of their size.

3 Challenge: Making meaningful progress on your long-term objective Most schemes have an end goal in mind. The UK findings from our 2017 Global Pension Risk Survey show that the vast majority of schemes are targeting either buy-out, self-sufficiency or other low risk positions, while our 2017 Fiduciary Management Survey shows that 56% of schemes now operate a flight plan a systematic plan or programme for dynamic de-risking as the scheme reaches pre-agreed triggers. Having a clear long-term path to the scheme s stated goal is important. Making progress on this, though, is not always easy. Breaking down the long-term objective which may seem a far-distant and huge aspiration into manageable and measurable steps can help to tackle this. We work with each client to diagnose their situation and give them access to the industry s most effective solutions like Aon s Risk Analyzer, which helps schemes to identify these steps and quantify their impact. 25 Taking a holistic view, looking at both asset and liabilitybased strategies, and by focusing on a series of marginal gains, schemes can chip away at deficits via a combination of strategies (such as Pension Increase Exchange or Enhanced Transfer Value exercises, Flexible Retirement Offers, trivial commutation or bulk annuity exercises) and smart execution. As a result, you can reach a position where full decommissioning is attainable, if that is your goal. Our clients often report that making progress has been difficult due to sustained low levels of gilt yields and lower asset return expectations all this despite record high levels of contributions being paid. This can create a genuine tension between schemes and their sponsors Whatever your aim, we work with you to choose the right approach for your circumstances, giving you access to the industry s most effective solutions, whatever your size and profile. Read a case study showing how this has been achieved in practice. 5 0 Buy-out deficit Commited contributions Expected asset performance Expected buy-out deficit at end of recovery plan Bulk PIE for pensioners Bulk ETV and FRO for deferreds Early retirement exercise Step 1: Liability management to simplify the benefit and remove liability at below buy-out cost Trivial commutation exercise Medically underwritten bulk annuity Agree insurer commutation terms Monitoring and negotiation Step 2: Smart execution to achieve the best pricing at the right time Potential buy-out deficit at end of recovery plan Compare this cost to the future running costs of the scheme when assessing affordability Jargon buster PIE: pension increase exchange ETV: enhanced transfer value FRO: flexible retirement option

4 Challenge: Tackling funding constraints and balancing the interests of all stakeholders This combines two of the top five identified challenges, as in our experience, the two are often interlinked. Sponsors have typically made significant scheme contributions for many years and this has reduced the cash available to use elsewhere. Trustees and sponsors need to balance support for the scheme with continued investment in the sponsor s business. But this creates a real funding challenge for many schemes, as has been borne out by the responses to our survey. The need to balance the interests of all stakeholders is key. Creating an environment in which the beliefs, objectives and constraints of the main stakeholders are heard and taken into account can be difficult. We work with our clients to understand all parties perspectives using innovative approaches like our Viewpoints tool. As part of our Trustee Effectiveness work, we have looked at how an insight into behavioural economics can also help drive better decision making. You can read more about this here. Funding constraints and this need to balance interests increasingly lead to alternative funding solutions, such as parental guarantees and other contingent assets. Our recent analysis of scheme funding valuations shows that 66% of underfunded schemes now have some form of alternative financing in place. We have vast experience of this, and can help assess and implement, if required the alternative financing options available. Aon Viewpoints Aon s Viewpoints framework (Discover; Develop; Deliver; Review) revolutionises the way trustees and sponsors work together on decisions, and has been designed to map closely to the Pensions Regulator s Integrated Risk Management (IRM) approach. Via an online survey, Viewpoints gathers opinions from your main stakeholders, and works through them to define scheme objectives. This allows your funding and investment strategies to be tailored to your scheme s specific needs.

5 Challenge: Keeping up with change The pace of change facing schemes continues to intensify. The member options introduced by the pensions freedoms to look at just one aspect of change have dramatically impacted those running DB schemes. Aon administers over 200 schemes in the UK and we have seen a six-fold increase in transfer values paid out between 2014 and You will need to provide sufficient support to ensure that members make the best decisions and achieve the best outcomes. Tools such as Aon s Retirement Options Model can help members make better retirement choices, while reducing risk for the scheme. This creates a huge challenge for administrators, not just in increased volumes of transactions, but in increased member expectations. The majority of members want to transfer near or at retirement, driving expectations of fast responses and turnarounds. A seamless workflow between administrator and actuary is key whether they are building increased automation to improve speed and accuracy, or keeping ahead of rapidly changing cashflow requirements. A joined-up approach is crucial to a positive outcome for member and scheme. Aon s experience is that schemes that quote transfer values and provide IFA support typically see 30 40% of members transferring at retirement, compared to 0 3% of those who offer neither. And with our 2017 Global Pension Risk Survey finding that a further 37% plan to quote transfer values at retirement, in the future, the appetite for transfers seems set to grow. While the headline-grabbing pensions freedoms have fundamentally changed the landscape, there are other changes that schemes also need to address. The challenges around GMPs reconciliation and, on the horizon, equalisation for example, and the need to tackle cyber-risk and the GDPR regulations coming into force in 2018, are also on schemes minds.

6 Challenge: Managing uncertainty Uncertainty and volatility have become an accepted part of the pensions landscape. We aim to help each client get to their objective which as we have seen in our Global Pension Risk Survey findings, is often reduced risk with as little time, risk and cost as possible. Uncertainty in one form or another can increase this time, risk or cost or all three on the journey to your target. If any of these variables can be reduced via the opportunities on offer, the higher the chances of all parties (sponsor; trustee and member) being able to meet their goals. Putting in place a best-in-class investment strategy; identifying and acting on risk reduction opportunities; implementing a governance structure to underpin your actions all of these will help your scheme improve its financial position. And of course, volatility can also present opportunities. The risk settlement market has been a good example recently; in some cases, careful planning and smart execution having achieved risk transfer with implied returns of up to 0.7% pa above gilts. Opportunistic de-risking can move schemes more swiftly towards their risk reduction goals. Being aware of the potential to de-risk, and preparing your scheme to transact when the time is right, are prerequisites. Using our proprietary Opportunities Register, we work with clients to identify the opportunities and ensure they are acted on when the scheme is ready. Our Risk Analyzer tool, coupled with our industry-leading risk settlement capabilities, can also help you monitor opportunities, and take advantage when the time is right. Bulk Annuity Compass Aon s Bulk Annuity Compass allows you to monitor the buy-in market to ensure you transact at an optimal price. Bulk Annuity Compass Request Benefit Data for spec. Client quotation specific Benefit specification Insurer queries Query log Member data quotation requirements Quotation Submit quotation

7 Working with you to tackle your biggest challenges At Aon, we believe better outcomes are achievable for every pension scheme, irrespective of their size. We re here to empower results Our experience of working with pension schemes of all sizes and profiles gives you access to the industry s most effective solutions. We make them work for you, your members and your scheme. Gary Cowler Partner +44 (0) gary.cowler@aonhewitt.com Becky McGowan Partner +44 (0) rebecca.mcgowan@aonhewitt.com Richard Cox Principal +44 (0) richard.cox@aonhewitt.com Whatever your challenges, we will have dealt with similar and can bring our expertise to bear on your specific issues. Diagnose your challenges and begin to explore how to address them. Alternatively, if you want to know more about how working with our experienced teams of actuarial, administration, investment and communications professionals can deliver better outcomes for your scheme, please us or contact one of the team using the contact details provided.

8 Appendix The challenges identified by our research are shown in the chart below. What are your biggest current DB challenges? Long-term objectives making meaningful progress towards a suitable end state Funding constraints achieving an acceptable outcome on funding that is consistent with the sponsor's level of affordability and convenant Keeping up with change responding to pensions freedom and choice for members, cyber risk, GMP reconciliations... Balancing the interests of stakeholders for example funding negotiations, investment policy and communicating member options Uncertainity managing volatility of pension cost / pensions in the corporate accounts Political risk managing the scheme in politically uncertain times Succession planning getting the right balance of skills Poor data ensuring your scheme administration and data management do not distract from your long-term objectives Not enough time achieving best outcomes while managing the scheme more efficiently Unexpected bad news too often you need to respond to unexpected hitches Lack of adviser continuity your delivery team has little longevity Other

9 We hope this has given you some food for thought about the challenges you face, and the ways you can tackle them. You can find out more and read our latest articles and whitepapers on our website. About Aon Hewitt Aon Hewitt empowers organisations and individuals to secure a better future through innovative retirement, health, and talent solutions. We advise and design a wide range of solutions that enable our clients success. Our teams of experts help clients navigate the risks and opportunities to optimise financial security; redefine health solutions for greater choice, affordability, and wellbeing; and achieve sustainable growth by driving business performance through people performance. We serve more than 20,000 clients through our 15,000 professionals located in 50 countries around the world. For more information, please visit aon.com

10 About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. For further information on our capabilities and to learn how we empower results for clients, please visit Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Registered Office: The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN aonhewitt.co.uk