Defined Benefit Pension Schemes24th August 2015
Defined Benefit Pension Schemes were once a mainstay for pension provision both in the private and public sector. Defined Benefit Pension Schemes are designed to produce an income built on an employee’s length of service and salary.
In recent years Defined Benefit Pensions have been hitting the news for all the wrong reasons, with many schemes facing large funding deficits. Many of the reasons for these deficits are completely out of the schemes control such as the increase in life expectancy and unpredictable markets resulting in investments not performing how they were expected. Defined Benefit Pension Schemes are currently putting companies under real strain and are halting their ability to grow as a business, in extreme examples causing the company to dissolve, placing the scheme in the Pension Protection Fund with much lower benefits.
According to European wide holistic balance sheet (HBS) Defined Benefit schemes could face a shortfall of £400bn if the most prudent of the six options produced was implemented. Currently shortfalls stood at £20bn at the end of 2014. Trustees are having to implement staggeringly high recovery plan employer contributions to the scheme each year only to see these payments wiped out by under performing investments.
More and more trustees and employers are looking to pension de-risking solutions to combat this problem and engaging with Employer Benefits Consultants to advise on the best course of action. Examples of the more popular solutions are:
- Enhanced transfer values Offer members an enhanced pension value to transfer their benefits out of the pension scheme therefore reducing the overall liabilities
- Bulk Purchase Annuity A bulk purchase annuity sees the transfer of a defined benefit pension promise, from an occupational pension scheme, written under Trust Law, to an insured policy, written under insurance law.
- Longevity Swaps A longevity swap transfers the risk of pension scheme members living longer than expected from pension schemes to an insurer or bank provider.
- Liability Driven Investment In essence, the liability-driven investment strategy (LDI) is an investment strategy of a company or individual based on the cash flows needed to fund future liabilities. It is sometimes referred to as a “dedicated portfolio” strategy.
Holborn Assets Limited provide an initial review service. This will establish the issues that are being caused by the scheme and determine which options may be suitable to remedy these. This will be presented to company decision makers in the form of a feasibility report and fee quotation where further action is appropriate. Once commissioned we prepare a detailed fully costed report with specific recommendations for implementation by the employer and trustees.
We oversee all aspects of implementation to ensure that any measure taken are as trouble free as possible.
For further details contact Matt Amesbury, Pension De-Risking Manager of Holborn Assets Ltd.
Office: 0161 969 2646