At an LCP webinar in June 2020, we asked people from a variety of pension schemes what the impact of Covid-19 had been on their scheme. I was interested to see a huge range of responses - in terms of both impact on funding positions and changes to employer covenant strength - as summarised in the chart.
We performed our own analysis on a selection of LCP-advised schemes and this was comparable to the poll results. Rolling this analysis forward to the end of October we continued to see a wide range of outcomes, but pleasingly a significant number of schemes were in a better funding position at the end of October than they were at the end of June.
How does your scheme stack up?
Source: LCP webinar poll, June 2020
However, sponsors may not have fared so well. For those in exposed industries, the covenant strength provided to the scheme may have substantially weakened, and existing journey plans may have been thrown substantially off course.
Change in funding level between 1 January 2020 and 31 October 2020 on a gilts flat basis
Source: LCP Sonar, October 2020
Whilst each scheme is in its own unique position, there are some actions that every scheme could take to reduce risk and increase the likelihood of a better outcome for members. Our Chart your own course: Your scheme, your journey report provides a six-point plan to help you develop a clear end goal and a journey plan to get there. It’s equally relevant whether you are implementing a journey plan for the first time or reviewing your existing plan in the light of recent events and future uncertainty.
Experience has shown us this year that those with a plan have managed to navigate choppy waters effectively. Analysis of our selection of schemes over the first half of 2020 showed that schemes that had reduced investment risk, perhaps as part of their journey to their long-term objective, for example by increasing their level of interest rate hedging, fared better.
We also saw that some schemes who had identified their end goal as buy-out and who had put in place a journey plan to get there were able to complete their journey by taking advantage of the attractive insurance pricing available as a result of the market volatility caused by Covid-19. Securing benefits with an insurance company is not only good news for members and trustees, but also for sponsors as it removes the risk of future contributions and allows management to focus on their core business activities rather than devoting time and resources to running a pension scheme.
Buy-in and buy-out market remains buoyant amidst the pandemic
As Fran Bailey highlighted during the conference, there are real tangible benefits to trustees from having a contingency plan in place, designed to maximise the probability of success whether things are going better or worse than planned. Steven and Fran both demonstrated that the key to achieving this is to ensure that all parties work collaboratively to understand the common priorities and develop creative and joined-up solutions to bridge seemingly unbridgeable gaps.
There is further uncertainty on the horizon, including from Covid-19 and the climax of Brexit negotiations. These could both cause a step-change in a sponsor’s covenant strength and further volatility in funding levels. That means now is as good a time as ever to implement or review your long-term target, the journey to get there, and the contingencies to keep you on course along the way.
Catch up on Fran Bailey and Steven Taylor’s conference talk here
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