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00;00;32;20 - 00;00;54;26
Joseph Wren
And in the fourth and final podcast situations involving a scheme in deficit and the scheme in surplus within the same corporate group. These podcasts are aimed at sponsors and trustees, and we'll take a holistic approach. The focus is on how to get a good outcome for all stakeholders rather than taking sides in a zero sum game. So to get the ball rolling, what do we mean by surplus?
00;00;55;00 - 00;01;01;23
Joseph Wren
And from a legal and regulatory perspective, what's an acceptable target likely to be? Don't you want to come on that 1/1?
00;01;02;27 - 00;01;22;20
Dan Naylor
Well, I think the answer is that the public means different things to different people in different contexts. But I want to try to give a slightly better answer to the question than that. So I guess I guess really most conversations about surplus, we're talking about surplus on a buyout basis on winding up. But but corporates will obviously be very interested in, in surplus on accounting and accounting basis.
00;01;22;20 - 00;01;51;04
Dan Naylor
And that will often be a key driver for a corporate in taking decisions around the pension scheme and from a pension scheme perspective, obviously there will be conversations around surplus that involve identifying a surplus on the scheme's own ongoing funding basis. And your question about sort of regulatory sort of targets, I guess one of the big open questions in pensions right now is, is the impact of the new code of practice and rules around funding of pension schemes and identifying surplus on a SO self sufficiency basis.
00;01;51;08 - 00;02;13;19
Dan Naylor
And there might be conversations for corporates and trustees around using some sort of surplus on that scheme scheme funding basis to to use that for for other purposes within the scheme. So solving it properly means different things to different people, different context. And the key thing always in questions around surplus is to identify what sort of surplus we're talking about when having these concessions.
00;02;14;10 - 00;02;18;23
Joseph Wren
Thanks to I think that's that's a topic we'll keep coming back to in these in these podcasts.
00;02;18;29 - 00;02;33;26
Karina Brookes
And I think is it worth adding that in some of the later podcast, we'll talk a bit more about structures that you can set up with a corporate outside the scheme where actually then you might be looking at surplus on a holistic basis between the two structures, the structure outside the scheme in the scheme itself.
00;02;34;04 - 00;02;34;12
Dan Naylor
Yeah.
00;02;34;17 - 00;02;49;02
Joseph Wren
So yeah, thanks, Karina. And actually just sticking with you, Katrina, one has the topic of surpluses and surplus management become more prominent on the corporate and scheme agenda? I suppose just to link in to that, do we think that that trend will continue?
00;02;50;12 - 00;03;19;22
Karina Brookes
Okay. So two questions. I think the first question, why has it become more prominent is obviously as a result of various economic environment things last year, schemes are some schemes at least and probably quite a number of schemes are in a better funding position than they have been. So this is probably higher up their agenda. Whether they're in the position you talked about where they already have a surplus on one of the basis we've talked about or whether or not that can see that that time horizon to getting to a surplus has shrunk.
00;03;20;28 - 00;03;48;08
Karina Brookes
Do I think that trend will continue? Yes, I think it will. As as we move further down that funding agenda. But I mean, to the point we've just made, the situation can change quite quickly. What we've seen in the last six months to a year is the economic environment being quite volatile, and that has meant that schemes have moved very quickly from a position where perhaps they didn't see a surplus on any basis for five, ten, 15 years, in some cases to a much, much closer term.
00;03;48;13 - 00;04;01;11
Karina Brookes
And they're off schemes, of course, who, who have come out of the recent economic volatility in a worse position. And so actually having to think about their that funding position and that surplus in a very different time horizon again.
00;04;02;12 - 00;04;16;23
Joseph Wren
So I think for the purpose of these sessions, well we've cut them up. So we talk about schemes that are in surplus and schemes that aren't in surplus. I think again, a recurring theme here is going to be that that position can move around and effectively the time to start.
00;04;16;23 - 00;04;18;28
Dan Naylor
Thinking of moving and moving quickly and.
00;04;18;28 - 00;04;19;08
Joseph Wren
Move around.
00;04;19;13 - 00;04;33;19
Dan Naylor
A of conversations you didn't think were relevant to you are now relevant and it just demonstrates the the need to to plan ahead and accept that you know especially with funding volatility can change can change so quickly for schemes.
00;04;33;24 - 00;04;44;21
Karina Brookes
And I think, you know, we've talked about, you know, one of my favorite topics is scenario planning from a company perspective, from a corporate perspective. But actually this is scenario planning for the scheme from a scheme perspective for the different types of funding environment.
00;04;45;03 - 00;05;06;25
Joseph Wren
Yeah, well maybe just sticking with that. And so while we're talking about these points, a high level, what potential surplus related issues can we can we sort of foresee from a sponsor perspective on from a from a trustee perspective? So maybe, Eimar, you might want to give us some some thoughts, particularly from an accounting perspective. And then Dan, I don't ever want to chip in with a few other legal thoughts as well.
00;05;07;22 - 00;05;32;06
Eimear Kelly
Absolutely. So, you know, the accounting lens is important for the corporates. There's no databases and there is a lot to think about at the moment. A lot of corporates have pension schemes that are in surplus on an accounting measure and that's given, you know, the recent market movements and in particular the movements on corporate bond yields. But that doesn't necessarily translate to a surplus on an insurance company measure.
00;05;32;06 - 00;05;56;09
Eimear Kelly
For example, as often insurance pricing is calculated on a more prudent basis than an accounting measure. So actually what you can find is that much of the surplus on an accounting measure could in fact be used up in the context of an insurance company by transaction. And so for that reason, I mean, it's important that these types of de-risking transactions and insurance transactions are actually thought through from an accounting perspective.
00;05;57;06 - 00;06;22;26
Eimear Kelly
The choreography in the timing is important, and it's important for corporate and other stakeholders to understand this and also to understand, you know, post for example, and insurance buyout events, how you might deal from an accounting perspective with, you know, potentially residual surplus left. I mean, you know, you could be in the territory there of benefit augmentations or refund to the corporates.
00;06;23;17 - 00;06;45;18
Eimear Kelly
Nice problems to have, but the accounting treatment does need to be understood and worked right. And then also for us gap reporting entities, there's another consideration when you're accounting for you know, financial scheme derisking or insurance company transactions. And that's how it all flows to the income statement because there's a quirk in the standard that slightly differs from UK gap.
00;06;46;04 - 00;06;50;01
Eimear Kelly
And again just needs to be properly understood and built into any planning.
00;06;50;10 - 00;07;18;15
Dan Naylor
As a lawyer that the accounting rules around pension schemes just a complete mystery to me, I have to have to admit. But I wouldn't. One of the thoughts that I have had is, is that clearly the there is benefit to the corporate in lots of scenarios having the sort of pension scheme SERPs on an accounting basis featuring the company's accounts and and one question I suppose is whether or not the current economic environment potentially means that that corpus will value that surplus on an accounting basis even more is that is that is that a real thing or so?
00;07;18;15 - 00;07;46;20
Eimear Kelly
That's a really interesting point, actually, Dan, I think I'd probably say yes or no and maybe Shades of gray, to be honest. There are clearly situations where it's probably not unattractive to have a surplus on the balance sheets in times of economic headwinds, although actually important to note that not all corporates that have schemes with accounting surpluses have the ability to recognize at all because there are indeed rules that restrict us in the absence of an unconditional right to us.
00;07;48;00 - 00;08;12;22
Eimear Kelly
On the other hand, though, as we can probably all recognize, a not a significant amount of accounting surplus could get used up in the event of an insurance risk transaction, as I spoke about a little bit earlier. And for that reason, there are corporates who, in anticipation of an upcoming future transaction, may take the opposite view. So it really depends on the circumstances.
00;08;12;29 - 00;08;17;23
Eimear Kelly
I think it can cut both ways and it's often dependent really on the future plans for the scheme as much as anything else.
00;08;18;12 - 00;08;25;01
Dan Naylor
Like it, something that just needs constant explanation to analysts and other people looking at the accounts when these things happen around pension schemes.
00;08;25;01 - 00;08;33;26
Eimear Kelly
Yeah, yeah, I think that's right. I think it is, you know, sort of on as we live and breathe this stuff daily, it can be it's not always.
00;08;34;22 - 00;08;41;12
Karina Brookes
Analysts and stakeholders and credit rating agencies and everybody are getting more sophisticated when it comes to pensions, but there's still probably a learning curve for many.
00;08;42;07 - 00;08;55;03
Joseph Wren
Well, thank you, Karina, Eimear and Dan, and please do join us for the second podcast. In this series we will be continuing the discussion about pension scheme surpluses and we'll be focusing on schemes in deficit where the sponsor contributions are ongoing.
