Improved governance needed to reduce pension scheme risks, Economist Intelligence Unit report finds
Asked about a range of techniques that could be used to reduce pension scheme risks, respondents thought that changes to governance to improve decision-making and control of pension issues would be most effective. More innovative approaches, such as liability-driven investment and bulk annuity buy-outs, were thought to be less effective and, to date, have not been widely used. For example, just 14% of respondents say that they already have liability-driven investment in place, although 41% expect to use the technique in the next three years.
In the right circumstances, companies would consider using bulk annuity buy-outs (whereby companies transfer some or all of their liabilities to a life insurance company or capital markets player). If they could do so at a competitive price with the full support of stakeholders, 60% of respondents said that they would transfer at least some of their liabilities. However, those conditions are not generally met, and as a result most respondents said that they would be unlikely to adopt this approach in practise: just 19% intended to transfer liabilities to an insurance company over the next three years, and 61% said that they do not intend to explore this option.
These findings form part of A Way through the maze: the challenges of managing UK pensions schemes, a newly-released Economist Intelligence Unit survey and report, commissioned by Towers Perrin. As UK pension schemes continue to face an uncertain future, the report examines the various techniques that companies can use to manage the risks associated with their scheme in terms of governance, funding, investment and scheme structure.
“There is widespread agreement that the risks associated with running UK pension schemes are becoming more severe,” says Rob Mitchell, editor of the report, “but there remains hesitation to adopt some of the more innovative approaches to managing these risks, such as liability-driven investment and bulk annuity buy-outs. In general, respondents believe that changes to governance processes are the most effective way of reducing pension scheme risks.”
Mark Duke, head of pensions at Towers Perrin said: “Many companies know they’ve got a big pensions problem. But it’s technically complex, often challenging to define a solution and sometimes near impossible to get all the stakeholders to take the necessary decisions. We agree with the survey respondents. Effective decision making has to be underpinned by good governance. The people who do this best are the ones who get to the right answers first and stop their problems getting bigger.”
Other key findings of the report include:
· Better knowledge and understanding is a key risk management tool. When asked about the aspects of their scheme management that they are keen to improve in the next few years, items related to “knowledge and understanding” score highly. For example, improving their understanding of funding options is seen as the main priority, cited by 42% of respondents, followed by improving their understanding of long-term trends, which is cited by 36%. With new risks on the horizon, and new techniques to manage, mitigate or transfer them becoming available, keeping abreast of new trends and often complex concepts has become more challenging than ever.
· Performance management remains an important weakness. When asked about their strengths and weaknesses with regard to different aspects of scheme governance, respondents saw their strengths as the setting and monitoring of investment strategy and the managing of relations between trustees and the corporate sponsor. They were also fairly confident about their ability to put in place a formal process to identify risks and monitor those risks on an ongoing basis. The main areas of weakness were seen to be performance management·of investment consultants and trustees in particular·and enhancing trustee competencies. Many companies, it seems, have difficulties in determining the metrics that apply to their scheme, and in conducting performance management based on outcomes.
A Way through the maze: the challenges of managing UK pensions schemes is available free to download at: www.eiu.com/sponsor/towersperrin/waythroughthemaze/
Notes for editors
About the report
A Way through the maze: the challenges of managing UK pensions schemes is an Economist Intelligence Unit report, commissioned by Towers Perrin. The Economist Intelligence Unit’s editorial team conducted the interviews on which the analysis is based and wrote the report. The survey consisted of 200 C-level, or board level UK executives, from a range of industries and company sizes.
About the Economist Intelligence Unit
The Economist Intelligence Unit is the world leader in global business intelligence. It is the business-to-business arm of The Economist Group, which publishes The Economist newspaper. The Economist Intelligence Unit provides geopolitical, economic and business analysis on more than 200 countries, as well as strategic intelligence on key industries and management practices. With over 300 full-time professionals in 40 offices around the world, supported by a global network of more than 700 contributing analysts, the Economist Intelligence Unit is widely known for its unparalleled coverage of major and emerging markets. More information about the Economist Intelligence Unit can be found at www.eiu.com.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, reinsurance intermediary services and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at www.towersperrin.com.
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