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The Pensions Pulse Survey, October 2008

In October 2008 Lucida published its inaugural Pensions Pulse Survey.

More than 50 trustees and scheme mangers, representing over 1.6 million members and well over £100 billion of assets, completed the survey. The findings suggest that trustees and scheme managers are facing an uphill struggle to do their jobs effectively.

There are real concerns over the funding of schemes, as well as increasing longevity and the impact of this on liability assumptions. The Pensions Pulse Survey also gives some insight into the potential solutions being considered in the market today.

Some of the main findings of the report are highlighted below. Should you wish to download a copy of the full report click here.

Highlights from The Pensions Pulse Survey

Concerns for the Future

There is an abundance of challenges facing trustees and scheme managers in the current climate, with the impact of many of these challenges changing on a daily basis.

It is not surprising that the biggest concern cited by trustees is increasing longevity risk, with 38 per cent of respondents saying this was their number one issue, as shown in figure 1. Longevity is one of the key risks faced by DB schemes. The Pensions Regulator has proposed a very prudent approach to longevity assumptions which, if adopted, could add between five and ten per cent to the liabilities of most schemes.

Matching liabilities through investment performance came in a close second and, with today's market challenges, this is a real concern for trustees. Some 31 per cent of respondents indicated that this was their primary concern.

This was in August 2008. Had our survey been conducted one month later, in September 2008, when global markets were sent into fresh turmoil, the number of respondents marking this as their number one priority might have been significantly higher.

However, even in August 2008 the financial climate was clearly causing some concerns about the financial strength of sponsors. The sponsoring company's commercial future came in as the third most frequently cited concern, with 17 per cent of respondents saying this was their biggest issue when considering the future of the scheme. This is supported by the increasing focus on employer covenant reviews and certainly not helped by the current financial market crisis.

Less than five per cent cited administration challenges as their key issue, but administration scores fairly highly on average, with most trustees citing it as of concern. This indicates that administration is an "always there" concern, but is not the biggest for most trustees.

Additional Resources

Almost everyone faces some kind of resource constraint that, if addressed, would enable them to do their job more effectively; and trustees and scheme managers are no different. Understanding the support requirements and being able to improve the situation remains a challenge.

Figure 4 illustrates that 42 per cent of respondents reported additional funding as the biggest requirement for managing their scheme more effectively. Additional funding to address deficits will always be welcome, but trustees are also signalling that schemes are becoming very expensive to run.

More money would allow them to manage the scheme in a better way and would perhaps allow them to deal with issues that are continually put off.

Longevity Assumptions

The response to longevity assumptions produced the most significant split in our survey results.

Of the respondents, 45 per cent consider that their scheme longevity assumptions are fine as they are. However, almost 50 per cent consider that they need to be reviewed or changed, especially in light of the Regulator's consultation paper. This is a significant result, reflecting much broader awareness of how unrealistic many schemes' assumptions have become. People are living longer; however, no one really knows the pace of improvement. Given the Regulator's recently published guidance recommending scheme longevity assumptions similar to long cohort, longevity will inevitably feature highly in the forthcoming round of scheme valuations and will prompt action around mitigating that risk.

Managing Liabilities

Trustees are clearly very interested in liability management and many have either considered or are now considering a range of ways to deal with it.

(N.B. Respondents were able to select more than one option resulting in a % higher than 100)

A popular approach, mentioned by 42 per cent of respondents, is the commutation of small pensions. Trivial pension commutation, following the administrative easement available to schemes, avoids expensive management costs and at the same time provides an immediate cash sum that is often more appreciated by members than a very small regular payment.

Enhanced transfer values had been or were being considered by 37 per cent of respondents. The provision of an enhanced transfer value can be a useful mechanism to help manage scheme liabilities, though care needs to be taken to ensure that information is given to members, with independent financial advice included where appropriate.

Buy-in or buyout has been or is being considered by 35 per cent and 33 per cent of schemes respectively. This shows the level of interest in eliminating scheme risks and reflects the substantial demand for this as a solution. There is an almost equal interest in buy-in compared to buyout in the survey, highlighting the need of trustees to consider the merits of both options. Larger scheme transactions have been predominantly buy-in and focused on pensioners only, suggesting a more phased approach to risk transfer. This may in part be due to the fact that pensioner buy-in is more affordable for many schemes than de-risking the entire scheme. It is perhaps surprising that buy-in does not score even more heavily in comparison with buyout.