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PCS Alert - January 2010

January 2010 - Exchanging pension increases

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Rob Dales FIA Rob Dales FIA

Risk Solutions

When the risks of DB schemes are considered it has led in many instances to significant pension changes and either:

  • A closing of the defined benefit plan for all future employees but existing participants can continue (usually on a reduced level);
  • A closing of the defined benefit plan to future accrual;
  • A closing of the defined benefit plan for the future with a new defined contribution proposition instead.
At these times of change PCS can advise the company as to how they may restrict the potential for increased liabilities and, where appropriate, effecting agreements directly with pension scheme members that have the effect of reducing scheme assets and liabilities.

Strategies can include:

  • Purchasing annuities (either selectively or in bulk);
  • Offering incentives to take transfer values;
  • Assessing the viability of  buying out some pension increases;
  • Maximising Tax Free Cash Sum (TFCS) take up;
  • Modifying past rights to replace a fluctuating liability with a fixed one.

The immediate and deferred annuity market seems undercapitalised and uncompetitive. Capital is flowing into the market and new product lines allowing the buyout of all or part of liabilities at commercially viable cost will come to the market. PCS are close to developments and are often involved in origination, allowing us to introduce products as they become available. Another example is credit insurance (with or without security), which is a less conservative approach that can be justified both in cash requirement and investment. Other forms of security may include bank guarantees, letters of credit, contingent asset security or the use of captives.

Creative use of other vehicles without the use of cash can often allow a higher risk investment strategy i.e. more investment in equities. The benefits are obvious; the opportunity for greater returns for the scheme and the resultant reduced funding burden on the employer.

 

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