Partners in Confidence: Implementing an investment strategy which enabled the pension scheme to achieve a successful buy in
Sponsoring Client: Implementing an investment strategy which enabled the pension scheme to achieve a successful buy in
Understanding the client challenge
The Long-Term Objective (“LTO”) of the Scheme (assets totalling £65m) was to fully secure members’ benefits through a buy in transaction over the next five years. However, the Scheme’s funding position had improved materially following favourable market conditions and an investment strategy that outperformed, creating an opportunity to move towards the LTO sooner than anticipated.
The Trustee of the Scheme asked us to support them in assessing affordability, preparing the assets and executing the buy in.
Providing a big name service on a first name basis
Our support was structured around three key phases:
- Gradual dynamic de-risking of the investment portfolio
- Implementation of a price-lock portfolio
- Asset disinvestment and transition to insurer
1. Gradual de-risking (12-18 months pre buy-in)
As the funding level improved, we worked closely with the Trustee to proactively and progressively de-risk the investment strategy, utilising market conditions to the Scheme’s advantage, thereby ensuring the Scheme was well positioned to transact when market conditions were favourable.
This included a phased reduction in growth assets, the orderly reduction of the Scheme’s illiquid, private market holdings and increasing the interest and inflation hedge ratios to minimise risk. A dynamic approach was applied to the management of and reduction in leverage, so hedging levels protected the funding ratio, whilst allowing value to be captured from market levels.
We monitored market buy-in costs and, as the funding level improved against this metric, we helped instigate the transition of assets into a portfolio designed to track market buy in pricing as closely as possible, minimising basis risk between asset values and insurer pricing.
2. Implementation of price-lock portfolio (one month pre buy-in)
Following a structured insurer selection process, a major insurer was selected. As soon as this decision was made, we worked with the Trustee and the Insurer to implement a price lock portfolio that closely reflected movements in the Insurer’s pricing mechanism. This ensured that the value of Scheme assets moved in line with the buy in premium, materially reducing the risk of adverse pricing movements delaying or jeopardising the transaction.
3. Asset disinvestment and transition support (on buy-in)
We worked alongside the Scheme’s Trustee, legal advisers, Actuary, investment managers and the Insurer, to ensure smooth and timely execution. We planned and facilitated the disinvestment of assets to meet the premium settlement requirements, ensuring assets were available at the right time.
Client impact – Outcome and results
As a result of our proactive advice, the Scheme was able to move at good pace towards its intended objective, and the buy‑in transaction was successfully completed ahead of initial expectations. This resulted in a material reduction in investment and covenant risk, a reduction in ongoing costs and most importantly, benefit security for all members.