Helping pension funds prepare for the endgame

Every pension fund is thinking about the endgame. Until a few years ago, UK pension funds basically had two options available to them as they approached the end of their lifecycle: pass over their assets to an insurance company or remain in the pension fund run-off world. But along with the emergence of consolidators, the landscape has changed considerably, to captive buy-ins and buy-outs, longevity hedging, enhanced run-off and DB master trusts.

learn more by listening to the podcast below and by joining to our Fireside chat.

Podcast, spotlights on Fiduciary Management

In this podcast Ian Brown, James Mullins and Nicholas Clapp consider some of the things that trustees need to think about as their scheme approaches its endgame and explain why Kempen is well placed to accompany you on your journey. Listen to the podcast!

Subscribe to the Fireside chat

Date: 21 June 2022
Time: 11:30-12:00 UK time
Location: Online via Microsoft Teams

Would you like to know more? Please join us for a fireside chat. We would like to get to know you and discuss the topics that are a priority for you. Please feel free to share your stories and experience. And ask any question that is top-of-mind. We are looking forward to hearing from you!

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About the speakers

Nicholas Clapp: Head of FM Business Development at Kempen Capital Management
Nicholas is Head of Fiduciary Management Business Development for Kempen in the UK. As well as working with a wide range of DB schemes, he is responsible for the work we do with consolidators, for DC and for charities and foundations.

Iain Brown: Managing Director, Head of Strategic Clients FM UK at Kempen Capital Management
He works with large UK DB schemes and takes the lead in introducing asset-class specific solutions to larger UK institutional prospects. Ian has joined Kempen in April 2022. He was formerly EMEIA Pensions and Retirement Leader and UK Pensions Partner at EY where he built EY's Pension Consulting business and was a founding partner of EY's OCIO/Fiduciary Manager Evaluation team. He advised trustees, corporates and governments, including some of the world's largest pension funds, on governance.

James Mullins: Head of Risk Transfer Solutions at Hymans Robertson's
James is a partner and head of Hymans Robertson's risk transfer solutions team.

Blog

In this blog we consider some of the key investment matters that trustees need to think about as their scheme approaches its endgame and explain why Kempen is well placed to accompany you on your journey.

Factors to consider

Starting with the end in mind is all well and good, but that’s the easy part. The difficult part is getting there and landing on the right option.
It’s important to follow an investment strategy that keeps as many of the possible endgames on the table for your scheme for as long as possible, so working with a fiduciary manager that understands the issues involved in each can be extremely helpful.

things to consider include:

1. The endgame option you have in mind for your scheme – whether that be buy-in, buy-out, some kind of gradual run-off or something else – will determine your asset allocation requirements in terms of what’s going to be passed on to an insurer, consolidator or just held within a pension fund.
2. As your scheme’s funding level improves and moves into disinvestment territory, you’re going need to invest more in income-producing assets over time, affecting your asset allocation. And, of course, asset liquidity will become more and more important.
3. Your scheme will need to generate enough asset returns to get to full funding before starting to disinvest; otherwise your asset base will need to be worked harder and harder with the subsequent increase in investment risk.

4. If your sponsoring company wants a higher asset return to achieve fully funded status than you’re willing to support, the company may need to provide your fund with a guarantee to enable it to cope with the volatility that might result from taking on more risk.

Another is the interaction between the endgame journey and responsible investing. Portfolios are already being positioned for net-zero but this is going to accelerate in the coming years and will become particularly relevant for schemes in longer run-off. For insurance transactions, insurers are going to look for portfolios that are already.

Kempen’s approach

We can take you through all the new endgame options available to you, their relative pros and cons and then we help you position your investment portfolio for today but reshape for tomorrow.
In our discussions about the best approach for you, we don’t just say here’s the investment return you need and the risk you’re going to have to accept. Rather, we take a step back and think about what investment return you will actually need and, importantly, how it will be structured and refined between now and the endpoint. That investment return is determined by which endgame option you have in mind and when you intend to reach it.

We also highlight the importance of retaining flexibility to adapt your planned endgame if necessary. If there’s a change to the sponsor covenants, your funding position, the market backdrop or insurer pricing, you might need to change your goals. That means you need a solution that’s not tied solely to an insurer or a consolidator – you need to be able to flex between one and another depending on what happens.

And we ensure we deliver our advice in a jargon-free way. We’ll set out a plan for your scheme and clearly explain how the different options could work for you and your sponsor. As part of our approach we focus closely on ensuring our investment advice stays fully connected to your actuarial, accounting and governance activities in what is a comprehensive service. We also ensure there’s good communication between us, sponsors and trustees and other advisers, which is key in making sure nothing falls through a gap.

Why is Kempen well placed to help you reach the endgame

We believe what sets us apart is our team’s wide-ranging expertise, which is not just solely linked to fiduciary management. We understand all the different endgame options available to you as well as matters such as insurer pricing, how insurers and consolidators might construct their asset portfolios and how companies might offer parental guarantees.

Our capabilities are reflected in the way other market participants choose to work us. For example:
. We were chosen by a consolidator to provide its investment solution, giving us considerable insight into how a consolidator invests and how a fund should derisk towards a consolidator pathway.

. We are in discussions with an insurance company about creating a preferred insurance pathway – again, the insurer chose to work with us.

. We’re also creating an enhanced run-off solution with a new entrant to the market that chose us due to our history of innovation.

Find out more

Often, there is a general perception that fiduciary managers aren’t keen to help you reach your endgame because it means they lose business. However, it’s now widely acknowledged that a good fiduciary manager can actually help you get there faster. Do you have any questions? Get in touch with our UK Fiduciary Management team, and subscribe via the form below to receive the latest updates.