Raconteur

Workplace Pensions special report 2018

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RACONTEUR.NET 15 it won't make a fi nal buy-out deal look less attractive in future. "You might be better off retaining control of those assets and investing them to generate a slightly higher return. This could enable you to set- tle more of the liabilities with a buy- out sooner. The challenge is decid- ing where in that risk spectrum you want to be." Mr May adds: "Also a buy-in leaves more risk with the employer as the asset is still on its balance sheet. So it's questionable whether the com- pany's investors will give you much credit for doing that." Most UK schemes are a long way from being able to make a full buy-out; the current £12 billion of insurance transactions a year is a tiny fraction of the £2 trillion of liabilities in defined benefit schemes. Most schemes need to get near to a state of full funding before they can afford a buy-out. But if they achieve this, they can invest in low-risk assets that match their liabilities and there is argua- bly then less need to insure. The cheaper option might be to keep the assets until the scheme is close to winding up, as administration gets proportionately more expen- sive at that point. "Deals done earlier than that are often driven by additional factors, such as large corporate transactions where tidying the pension scheme makes sense," says Mr May. "For example, Cable & Wireless derisked its pension scheme in 2008 prior to a demerger. ICI has done a series of derisking deals following takeo- ver by Dutch fi rm Akzo Nobel. Also Philips completed a buy-out after splitting the business into two." Independent trustee George Taylor has worked at the coal face of derisk- ing activities at several schemes. "In all cases, it started by moving stead- ily towards a lower-risk investment policy," he says. "The downside of that is lower returns. But the regu- lator requires insurers to hold low- er-risk assets, so you have to do that to make it insurable." Mr Taylor says two signifi cant obstacles to a buy-out are often issues related to administration or data. "Pension schemes are com- plex and often have unresolved issues in their data," he says. "The insurer won't take them on with those issues because trustees can interpret them and exercise discre- tion, but insurers cannot. They have a more automated payment system. So it requires much work to tidy your data, administration and other issues, such as equality of benefi ts between members." The £3-billion Merchant Navy Offi cers Pension Fund (MNOPF) has been a derisking pioneer. The scheme has made several buy-ins since 2009, plus one buy-out and an innovative hedge of £1.5 billion of longevity risk in 2015. Andy Waring, chief executive at MNOPF, says: "A signifi cant improvement in funding enabled these moves, aided by the appoint- ment of consultant Willis Towers Watson as delegated chief invest- ment offi cer. This led to a plan to improve funding, which grew from 69 per cent in 2012 to 88 per cent in 2017 and is on target to achieve over 100 per cent by 2025. "The success of this strategy, at a time when many other schemes' funding levels deteriorated, enabled the fund to further secure its mem- bers' benefi ts and saved over £300 million in defi cit contributions for its employers." ns is the safest option Buy-ins are the biggest growth area as going straight to full buy-out is more expensive and beyond the means of most schemes Howard George / Getty Images How UK schemes are changing their investment strategies Percentage of trustees and pensions managers or sponsors who made the following changes to defi ned benefi t scheme investments in the past year Aon Hewitt 2017 UK equity Structured products Property Overseas equity Fixed-interest gilts Active asset allocation Corporate bonds Illiquids Index-linked gilts Alternatives Liability-driven investments ...because one size doesn't fit all. With so many retirement income options available for employees, we know that a 'one size fits all' approach to retirement planning doesn't work. Therefore, we created our Retirement Income Options service to implement and manage retirement planning for employees and to determine the best course of action based on their personal circumstances. In order to protect employees from poor decisions, our complete service ensures employees/members receive the help they need to understand all of their options at-retirement. The service consists of: Financial education and guidance: provided in a number of formats to ensure retirement income options and tax issues are understood Regulated advice: as every situation is different, this is designed to ensure everyone has a personalised plan Implementation of options: this allows a holistic solution to be implemented and managed throughout retirement Ongoing support: continuous guidance, advice, and management of income throughout retirement This service is available now to pension schemes, trustees and employers, so whatever retirement income plan is needed by employees and scheme members, they can access it through our fully integrated service. WEALTH at work and my wealth are trading names of Wealth at Work Limited which is authorised and regulated by the Financial Conduct Authority and is a member of the Wealth at Work group of companies. Registered in England and Wales No. 05225819. Registered Office: 5 Temple Square, Temple Street, Liverpool L2 5RH. Telephone calls may be recorded and monitored for operational and training purposes. To find out more about how we can help your employees make the right retirement income decisions, please call 0800 234 6880, email info@wealthatwork.co.uk or visit www.wealthatwork.co.uk 0% 10% 20% 30% 40% 50% Increased investment Reduced investment

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