The analysis shows that a £500m scheme, for example, could lose out on over £10m if a plan has not been put in place due to project delays and increasing costs. This loss could also be caused by schemes losing out on potential surplus – with the risk remaining even once the scheme has terminated. The firm says that prior to engaging with insurers, the appetite for risk must be fully understood and meet the needs of both trustees and sponsors.
They believe that understanding the main types of risk is key to avoiding unexpected future costs. Getting to grips with these risks – surplus, timing, member experience and residual risk approach – will also influence what actions corporates can take to reduce risk at all stages. A recent webinar by the firm found that over half of all respondents (55.9%), do not believe that their scheme has a clear strategy for managing residual risks post buy-out, and over a fifth (21%) haven’t considered residual risk as part of their endgame journey. This highlights the significant gap between long-term risk and endgame planning; potentially exposing the sponsor to risks which are reputationally damaging but also have long lasting and significant financial consequences.
Commenting on the need for risk to be considered at the start of any endgame planning, Jo Gyte, Partner, Hymans Robertson says: “If buy-out is the scheme’s chosen endgame, it’s imperative that a plan is put in place as early as possible to avoid spiralling costs further down the line. Upfront alignment and clarity will set the right path from the outset, and facilitate timely decision-making along the way. A sponsor must take control and engage with the trustees early in the process to answer key questions. These include how any potential surplus will be distributed, the preferred timing for completing the buyout, expectations regarding the experience of the scheme’s members and the approach for managing the risk of further liabilities emerging in the future, including following the wind-up of the schemes. The buyout and wind up of a DB pension scheme is the most substantial project that a scheme will ever complete. Even once a buy-out has concluded, there may still be consequences for a sponsor, financially and beyond – further reiterating the need to ensure risk is built into plans right from the beginning.
“To help alleviate this, a concerted effort to consider the key drivers of risk should be a central theme of the endgame planning process. Taking the time to factor these in upfront, from both the trustee and corporate position, will avoid potential issues arising at a later date. At a basic level, this will allow a smoother journey from status quo to buy-out, but it will also ensure all stakeholders are comfortable with the outcome achieved. Our recent webinar highlighted that best practice and reality do not always match up; over half of those surveyed were concerned that their scheme does not have a clear plan in place and a fifth not having considered risk as part of their endgame journey. “To avoid future surprises, it is imperative that all areas of risk are considered as part of endgame planning journey, and ahead of the buy-in transactions with the insurer.”
A copy of the ‘Failing to stay ahead in buy-out could cost sponsors millions’ paper can be found here.
|
