Lucida PLC

Trustees will take a more activist role in reducing risk for pension scheme members

Oct 09 2008

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Pension trustees will take a much more activist role to reduce risk in defined benefit schemes, according to a new study by Lucida, the pensions insurance company.

Jonathan Bloomer, Executive Chairman of Lucida, commented: “The issues facing trustees and pension scheme managers are becoming increasingly complex, particularly given the current uncertainty in global financial markets. Trustees, advisers and insurers have a key role to play in navigating today’s financial storms and safeguarding the benefits of members. Given the increasing pressure on employer covenants and defined benefit pension schemes in general, I believe we will see trustees taking a more activist stance in managing scheme risks.”

More than 50 trustees and scheme managers, representing over 1.6 million members and well over £100 billion of assets, completed the inaugural Lucida Pensions Pulse Survey.

The findings suggest that trustees and scheme managers are facing an increasing array of challenges with real concerns over the funding of schemes, as well as increasing longevity and the impact of this on liability assumptions. The results of the survey, alongside the dramatic changes in the financial markets over the past month imply that trustees will now have a much greater role in ensuring that DB schemes are fully protected, with buy-ins and buyouts already identified by trustees as serious options.

According to trustees, additional concerns include:

Increasing longevity

Increasing longevity risk is the biggest concern trustees have when considering the future of their defined benefit pension scheme. 38% of respondents cited this as their primary worry.

Respondents were divided on their view of their pension schemes’ longevity assumptions. While 45% consider their longevity assumptions fine as they are, almost 50% believe that they need to be reviewed or changed, especially in the light of the Pensions Regulator’s consultation paper. This is a significant result, reflecting broader opinion of how unrealistic many schemes’ assumptions have become.

Additional funding requirement

42% of respondents reported that additional funding was the biggest requirement for managing their schemes more effectively. Additional funding to address deficits will always be welcome, but trustees are also signalling that schemes are becoming very expensive to run.

Reducing risk and 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. 1 in 3 respondents have considered, or are considering, a buy-in or buyout of their scheme. Another popular approach, mentioned by 42% of respondents, is the commutation of small pensions.

Insured solutions

It is clear that insured solutions, whether buy-ins or buyouts, are becoming an integral part of the DB pension scheme market. In considering an insured solution, the highest priority is the financial strength of the insurer, selected by 44% of respondents.

Risk free discount rate – not a good thing

84% of respondents were against the proposal that schemes should adopt a risk-free discount rate to measure pension liabilities in company accounts. Most thought it a step too far, while almost 40% thought it was completely inappropriate.

 

For further enquiries please contact:

Lucida

Jemima Fitzgerald: +44 207 647 1623