Disclaimer: Transcripts are autogenerated and so may not be 100% accurate. For corrections please contact us.
00;00;23;16 - 00;00;42;23
Karina Brookes
So no more contributions are being paid. But obviously there are some interesting questions around this from a sponsor and a trustee perspective about what can be done with those surpluses. So to kick off, I was going to go first to to you, Dan, and ask just a little bit around what kind of options in that situation do the sponsors and trustees have?
00;00;43;25 - 00;01;11;21
Dan Naylor
I mean, we've previously spoken about sort of efforts to avoid surplus being built up, and that's clearly from from a corporate and sometimes atrocity perspective, the easier way to to deal with surplus issues. I mean, the options where a surplus is already in existence or obviously much reduced. And if we're talking about surplus on a buyout basis in the context of of of winding up, then clearly the the the issue is very much dependent on the rules of a particular pension scheme, and that will vary.
00;01;11;29 - 00;01;30;28
Dan Naylor
I mean, typically there will be a very massively but the very often trustees will first of all, have an option to to exercise the discretion to spend some of that surplus. And there'll be a question mark as to whether or not they want to do that and whether or not they feel they should sort of benefit the members from a surplus or pay some of that back to the employer, if that's what the rules allow.
00;01;31;00 - 00;01;53;29
Dan Naylor
I think at that point, it very much does depend on what the rules say. And and once the surplus arisen on the basis of very, very minimal options to to change the rules in a way that would affect that surplus. That's the sort of thing that I think trustees could could possibly think about ahead of a surplus, been being generated as part of a package of things of an employer to give the incentives to fund the pension scheme as the trustees would want it.
00;01;54;06 - 00;02;01;03
Dan Naylor
Once you've got that surplus in the scheme on a buyout basis, it's quite difficult, I think, to change the rules now.
00;02;01;19 - 00;02;20;00
Karina Brookes
So just to sort of pivot slightly then thinking about if you're in that situation where you've got a potential surplus, is there an option and do we see sponsors and trustees may be looking the option of continuing to run on over time rather than sort of crystallizing that option in a buyout? It might be.
00;02;21;10 - 00;02;54;05
Eimear Kelly
Yeah, absolutely. So there are schemes out there and corporates respond to those schemes who, you know, they are sort of starting point is that they would run the scheme on rather than transfer to a third party insurer. You know, and so it's absolutely that's a valid sort of course of action because there are costs attached to, you know, ensuring that in the securing the scheme and the the risks attached to the scheme and overall, it is more costly for a sponsor to to buy a house than potentially to run the scheme on.
00;02;54;05 - 00;03;00;19
Eimear Kelly
So absolutely, it's, you know, something that will be the course of action for some.
00;03;01;01 - 00;03;10;04
Karina Brookes
And do we think I don't know whether to ask you again to slow it down, maybe. Do we think there need to be something that will impact that in terms of people is.
00;03;10;06 - 00;03;32;25
Dan Naylor
Going to force it's going to force conversations that potentially haven't happened previously where where corporation trustees might have had some sort of secondary sort of funding objective or some sort of, you know, not documented, but common understanding as to where they were trying to get to. That's going to change. And corpus and people need to record that that their end point and that will, I think force those conversations.
00;03;32;25 - 00;03;47;08
Dan Naylor
You know, are we going to target sort of long term self sufficiency? Are we going to run off and sort of generate surplus? And and that's a different sort of surplus. Obviously, that's the sort of surplus that maybe there'll be conversations about how that value is is applied as between pension scheme members and corporates potentially. Yeah.
00;03;47;18 - 00;04;18;09
Joseph Wren
I think just following on from that, I mean the the buyer option having been seen as the gold standard or the end goal for a lot of schemes for for some time. But getting to that position where you are in surplus and having that conversation between trustees and sponsors and potentially thinking to, to run forward is a good moment at which to actually reflect on whether that is in fact just a really good thing to be doing because obviously and you know, tune is very much in your world as well.
00;04;18;09 - 00;04;37;20
Joseph Wren
And on the covenant side, the sponsor covenant may be as good as the insurer covenant or just different. It might be better in some cases. If it's if it's a very strong sponsor, there may be a possibility for some kind of buy in, partial buy in or multiple buy ins to then sit alongside an investment strategy within the scheme.
00;04;37;20 - 00;04;58;20
Joseph Wren
And so effectively there's a situation where there isn't a buyer, but there's still insurance protection, protection in there. And again, that just brings in sort of discussions around on an ongoing basis is that sponsor covenant going to be the Irish fortunes change of actually the cure for cancer arrives and the whole world looks different. But there's quite a lot of interesting stuff to unpick from this, actually.
00;04;58;20 - 00;05;17;14
Dan Naylor
Potentially some some interesting discussions or potential for different views between trustees and corporates, where the trustees might be happy to sit there with that sort of global covenant type insurer covenant, corporate covenant, FSCS pension, pension protection fund. You know, why wouldn't you want the best of all of those worlds if you're a trustee? Where's the corporate might be?
00;05;17;24 - 00;05;21;09
Dan Naylor
I'd be very much looking forward to getting those some of those risks off of the balance sheet.
00;05;22;19 - 00;05;45;18
Karina Brookes
And so just to then to obviously we've talked about then the running off, but what about if you're in the situation, I suppose that is the way you're looking at this. There's what's been seen as the traditional outcome where you're actually running towards a buyout and perhaps that has come much closer towards here in this in this current time horizon, you know, in this current economic environment, what prior to what priorities should you have and what things might still be?
00;05;45;18 - 00;05;50;14
Karina Brookes
There are stumbling blocks, even if, on the face of it, you've got a surplus today. They might. You want to pick up first?
00;05;50;14 - 00;06;08;18
Eimear Kelly
Absolutely. So, I mean, there's you know, I guess there are many schemes who are now finding themselves in situations where they're much closer to bias than they might have thought they were, say, 6 to 12 months ago. And, you know, there are a whole host of things that need to be thought through for those that are thinking about an approach to market at this time.
00;06;09;00 - 00;06;30;20
Eimear Kelly
So, you know, you've got to make sure the the data sort of stacks up and is appropriately cleansed and looked at, you know, the things like, you know, what are you going to do with your liquids if you're holding a lot of liquids? How how have you done things like GMP, equalization and sort of all that good housekeeping and governance that needs to be worth three.
00;06;30;25 - 00;06;52;10
Dan Naylor
Really interesting feature of the whole you, the LDI, particularly of the issue. I'm not sure what a better way of describing it, but is the way in which schemes, situations move quite quickly. And as you say, there are lots of schemes and so they can only play for a little bit on a bio basis but are nowhere near being able to go across the market to, to, to actually enter insurances or the insurance and insurance contracts.
00;06;52;17 - 00;07;16;24
Dan Naylor
And there's an interesting, I think, sort of period potentially ahead where, where, where sort of financial economic capital. Isn't the restriction on all schemes getting into viable lots of human capital just just the, the time it takes to get schemes into that position and the sort of the queue that these schemes are forming with their respective advisors and administrators to do some of those jobs that you describe ahead of getting into the insurance market.
00;07;16;24 - 00;07;35;16
Karina Brookes
And that's the real issue of capacity as well around some of those things, aren't there? So I think there is something about my perspective as well around how how you protect your position over that time horizon, which is to say you might have a funding surpluses might appear to be a funding service on day one, but that needs to be protected as best it can because it might take time.
00;07;35;16 - 00;07;39;21
Dan Naylor
And where are you in the queue to get to, etc., etc.?
00;07;39;23 - 00;07;54;11
Eimear Kelly
And I think that capacity constraint you referred to that is potentially at both ends, both the insurance and because they're of out from the source I think and then also at the adviser end, because there are so many more schemes that are now in a position where they can transact.
00;07;55;29 - 00;08;19;22
Joseph Wren
The whole the whole optimization of the scheme in terms of being transactional is definitely something that, you know, we have a lot of discussions around, certainly as we said in relation to human capital, in relation to the asset side, you know, I think if you have your assets in a good shape, they can either be transferred across to your insurer or potentially you can work out some other arrangement for them.
00;08;19;28 - 00;08;38;03
Joseph Wren
You are just going to naturally find yourself further up the queue than if you've got a really, really difficult asset which potentially is full of, as you researched it, liquids and various other sort of more, more, more challenging assets for a for a transaction. So again, that whole process of optimization is is definitely something that just keeps coming up.
00;08;38;16 - 00;09;04;26
Dan Naylor
And a recurring theme again is the way in which the schemes situations have changed rapidly, joining sort of the elderly. The elder issue that lots of schemes that weren't thinking that they were liquids were going to be a barrier to the time frame for that for end game. Actually, I'll find themselves in that situation so that there will be a need for potentially for insurers to be a bit more flexible around how they view some of those assets and look to look to accommodate ways of working and take to those assets in specie.
00;09;05;11 - 00;09;05;21
Joseph Wren
Agreed.
00;09;05;28 - 00;09;19;03
Karina Brookes
Brilliant, thank you very much. Join us again for the final instalment of our series of podcasts. And the next time we'll be talking about a slightly more complex situation, maybe where sponsors have schemes that are both in deficit and in surplus.
