Too much of a good thing? - Is too much choice killing pension scheme decision making?
In 2013, the majority of UK pension schemes find themselves with a deficit hole to fill. Most UK pension scheme trustees and corporate sponsors are relying on investment returns and favourable market conditions to help them do this. But when is the right time to consolidate increases in the assets or falls in the liabilities? How do you do this? Focusing on a 'set menu' of key factors can help trustees avoid ‘à la carte' indecision
Flight paths1 can help capture those times when the markets reward us. Improvements in funding levels can be monitored and acted upon in a timely manner through pre-specified de-risking mechanisms. Having such a trigger-based framework in place allows changes to be made to a scheme quickly and confidently.
So why haven't more pension schemes embraced these types of solutions? In a recent survey2, less than 50% of UK pension schemes had a flight path in place in 2012, although the majority intended to do so at some point in the future. Costs, difficulty and lack of necessary governance were all cited as reasons why they hadn't implemented a flight path to date.
Such de-risking frameworks may not be perfect, but intuitively, having a de-risking plan in place must be more effective than having no plan at all.
The benefits of simplicity
Consider a typical pension scheme looking to design a flight path. These flexible and robust solutions are designed to fit with the pension scheme's own governance and belief system. However, the bespoke nature of this strategy means that a lot of decisions will need to be made by the trustees.
Given all these decisions, is it any wonder more pension schemes do not have a robust risk reduction plan in place? This is especially true when considering smaller pension schemes where it can be even more difficult to find the governance or cash budget to make all of those decisions. However do you have to make all of those decisions? What if you just had to focus on the really important ones? We explore this idea below.
Now think of visiting a high quality restaurant. The waiter hands you the à la carte menu; a long inventory of wonderful delicacies with exotic ingredients, tempting side dishes, added extras; bread and sparkling water, alongside a wine list with hundreds of wines to choose from. Sound familiar? All very tempting to the excited and hungry diner. Sounds a bit expensive though… and what will be left uneaten that wasn’t really needed, yet still has to be paid for?
Now consider the same restaurant, but this time you have a menu showing a selection of equally
delectable dishes hand picked by the chef himself - usually at a lower price than the à la carte version. This is the Set Menu. The aim of the Set Menu is to offer the customer the advantages of a less complex menu (which benefits the kitchen) by providing a ‘best in class’ good value menu (which benefits the customer).
Now instead of ‘customer’ think ‘pension scheme trustee’. And instead of ‘restaurant’ think ‘fund manager’. Can the Set Menu principle be applied to flight paths?
What is really important in a de-risking plan?
À la carte flight paths can be time intensive and costly to set up and run. We have refined the different flight path decisions into a set of good value ‘principles’ – concentrating on the decisions which have the most value or benefit to the pension scheme. This helps us to build the ‘Flight Pat Set Menu:
The views and opinions contained herein are those of Dianne Ramsay, UK Strategic Solutions at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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