Vidett’s inaugural ‘Risk Transfer Conference’ took place at Villa Park earlier this year; attracting over 200 attendees from across the pension industry. I hosted a fantastic session on ‘Providing sponsors with certainty’, where we discussed the vital role of sponsors in the risk transfer stage of a pension scheme’s life. On the day, I was joined on stage by Adam Davis of K3 Advisory, Liz Jewkes of Serco, Costas Yiasoumi of Willis Towers Watson, Rosie Fantom of Barnett Waddingham and Sammy Cooper-Smith of Rothesay.
No surprises please
Pension scheme sponsors need to accompany trustees throughout the risk transfer journey – understanding the process, being aligned and actively engaging. While achieving absolute certainty may be challenging, it’s important to identify areas that require greater certainty at the earliest opportunity. A collaborative approach can achieve this most effectively. Surprises at the last minute are undesirable for everyone, especially sponsors.
Avoiding uncertainties
Collaboration and trust between the sponsor and trustee board are essential during the risk transfer process, which means effective communication, information sharing and regular updates. As a strong and competent trustee board forms the bedrock of this relationship, the scheme sponsor needs to ensure employer-nominated trustees have a diverse range of skills and perspectives.
The goal is to establish a trusting and open working relationship. While the trustees bear the responsibility of insuring the scheme’s liabilities, the decisions made during this stage have implications for the employer as well.
To avoid surprises, proactive trustee boards can undertake comprehensive preparation early on. This includes ensuring accurate and reliable data, conducting a thorough legal review of the transfer of defined responsibilities, understanding the associated benefits, documenting them meticulously and proactively addressing emerging issues.
It’s essential to identify and draft deeds for the transaction agreeable to all involved parties, maintain effective communication with sponsors, the insurer and scheme members to keep everyone well-informed and engaged.
Clearly defining the roles and responsibilities of each party is also key. Once a plan and pricing is agreed, it’s important not to succumb to market pressures. Hasty decisions are unlikely to benefit the scheme and its members!
Key focus points
Every employer is unique, but they all want to know three key things:
- How does this impact the business?
- Are the trustees looking after our interests?
- Are there likely to be any surprises?
Alongside this, you can be sure sponsors will need reassurance on:
Cost: price is usually the main concern, but it needs to provide good value for money in terms of member experience and administrative support.
Funding position: if there’s a shortfall, sponsors need to understand if it will change. If there’s a surplus, they need to be aware of the rules and expectations surrounding it. If a pension scheme is in surplus, most sponsors will want to secure it quickly to avoid deficits in the future.
Accounting: this is often a driving factor for some companies and requires engagement with the sponsor’s auditor. Trustees should be mindful of this. Accounting practices can differ.
Trust: sponsors want pension trustees to openly discuss important aspects and issues with them. They want to be consulted and know if the trustees are considering additional requirements, such as member option terms. Sponsors also seek to identify and address risks proactively to avoid surprises in the future. Engaging a corporate adviser can provide additional reassurance, helping sponsors understand the situation and providing perspective on any concerns. Pensions are typically not the sponsor’s top priority – they are busy running their organisations, so an adviser being on the team sheet is an asset.
Alignment and advisers: in smaller transactions, sponsors and trustees may find themselves more aligned. Both also want an adviser they can trust to act in their best interests, listen to their objectives and facilitate progress. This makes alignment all the more crucial.
Timing: sponsors need to understand the timing of the process for effective business planning, stakeholder management and investor relations. They should be aware of the key steps, timeline and decisions required along the way.
So, what is the pension trustee’s role?
At Vidett we focus on collaboration, getting the best out of advisers through a team approach and, of course, ensuring no surprises. We integrate the sponsor into the risk transfer project team when going out to market is a consideration rather than a decision already made. This ensures the sponsor’s commitment is not only evident for the pension trustees but also provides insurers with the necessary assurance.
We know it’s all about being aligned and there’s no other time on a pension scheme’s journey when this is more true.
Please note this blog originally featured in Professional Pensions on 21st June 2023.
