“Trustees and employers should be agreeing a clear strategy for achieving their long term goals, recognising how the balance between investment risk, contributions and covenant support may change over time, particularly as schemes become more mature and potentially better funded.”
The Pensions Regulator, announcing the 2019 Annual Funding Statement
Schemes are often over-exposed to the fate of a handful of businesses in their covenant and the volatile returns of their investments. Getting to a place where less reliance is placed on these factors is crucial – this is a long journey for many schemes and requires careful planning.
Valuations are formal checkpoints along the journey to ensure risks remain balanced, but key variables need to be monitored continuously and contingency plans put in place, to prepare for expected events and withstand the unexpected.
In the four roadmaps below, we identify tools, resources, and ideas to help you successfully navigate through key phases of your scheme’s journey. Where is your scheme now?
Plotting a stable route using a variety of tools and resources
Few people get in a car without knowing where to go or a rough idea of how to get there. Yet pension schemes are often managed without a clearly expressed end-game target, or a plan of how to reach it. Like a map or GPS unit, journey planning provides you with much-needed guidance to help your scheme achieve its objectives.
Below we set out what resources are available to help you plot a stable and achievable route, taking into account The Pensions Regulator’s 2019 Annual Funding Statement and integrated risk management (“IRM”) guidance.
“Paying the promised benefits is the key objective for all schemes. This requires schemes to look ahead and set clear plans for how the objective will be delivered.”
The Pensions Regulator, 2019
If you want to know more about why The Pensions Regulator is focusing on long-term targets, consider covering some core IRM concepts at your next board training session:
The Worry Index can help trustees understand the magnitude of the risks they face, and whether they need to consider steps to mitigate these in the short-term.
Determining what destination you want to set for your scheme is best done with all your advisors in the same room, so you can agree what’s realistic and achievable.
Put yourself behind the wheel of a simulated pension scheme and manage its journey towards an end-game target.
As your scheme matures its risk dynamics and liquidity needs will change. It is crucial to consider this in your journey planning and risk management.
Once your end-game is agreed, it’s important to balance cash contributions with investment returns in a way that works for your specific situation.
Any analysis needs to consider the above factors, and more, in aggregate – IRM can rarely be distilled into a single number.
Determine the best way to invest your scheme’s assets, taking into account your end-game target and the level of contingent support that may be available from your sponsor.
Identify what events could cause your pension journey to go off-track, and plan how best to respond.