Disclaimer: Transcripts are autogenerated and so may not be 100% accurate. For corrections please contact us.
00;00;24;00 - 00;00;48;27
Eimear Kelly
So you'll recall of the first edition we discussed the general market landscape and why the issue of pension scheme surplus has become more prominent in recent times. In the second edition, we looked at pension schemes that are currently under access and paying contributions and what sort of forward looking planning they might want to be considering. And then in the third edition we discussed schemes in surplus where contributions have already ceased.
00;00;48;28 - 00;01;18;01
Eimear Kelly
So in this fourth and final edition, we're going to cover some of the issues that arise in this scenario, which often crops up and where you have a corporate sponsoring more than one defined benefit pension scheme, and in particular the scenario where they will have disparate funding levels. So before I dove in, it's probably just worth reiterating that these podcasts are aimed at both sponsors and trustees, and they're intended to be focused on all the issues that are relevant to all the stakeholders.
00;01;18;14 - 00;01;38;04
Eimear Kelly
So maybe I could I could start with you. So, you know, we often come across the situation in our work where there's multiple schemes sponsored by the one core for us. I mean, what options are available to sponsors where they have one, say, underfunded scheme and then another scheme that's actually quite well funded and doesn't need a cash immediately?
00;01;38;29 - 00;01;59;22
Karina Brookes
Okay. Well, so there are a number of options and some of them relate back, I guess, to some of the other sort of structures we've talked about. I suppose at the most fundamental level you can look at merging two schemes. There are some potential barriers to that around funding levels and what kind of compensation or agreement you might need to make around the different funding levels.
00;01;59;28 - 00;02;25;21
Karina Brookes
There are also issues with scheme rules potentially, and I come back to that. You can also look at factionalized or segregated measures of schemes which perhaps get over some of these issues around funding. Also, we've talked in the second and third podcasts around some of these structures that corporates and trustees might set up outside the scheme. You could use a captive insurer or maybe even one of these sort of reservoir trusts or rescue accounts with with assets and passion.
00;02;25;21 - 00;02;33;16
Karina Brookes
It could be used again to try and rebalance that situation by a buy sponsor, depending at the time at which they've sort of thought of setting up the structure.
00;02;34;01 - 00;02;51;20
Eimear Kelly
Yeah. So you mentioned, you know, scheme rule change, and that's an interesting one. I mean, Dan, maybe I could look at you and ask, you know what like I mean for for an I'm from a non pensions law point of view you know when what's the barrier to changing the rules and when when can you change the rules.
00;02;52;12 - 00;03;10;10
Dan Naylor
Well, I mean in the in the story which you you mentioned, they're sort of one under-funded scheme and one better funded scheme. Didn't include the way the trustees will will likely to approach that. The first thing everyone always thinks about in a merger is what will the respective funding levels and what's the what's the impact, what's the funding level of the merged scheme?
00;03;10;17 - 00;03;25;04
Dan Naylor
So clearly you've got one scheme that would seem to seem to benefit from that improvement in funding level and of a set of trustees who are thinking, well, what's in it for us? Because we're transferring into an underfunded scheme and we're using some of the assets of our scheme to improve the funding level, typically for the benefit of the corporate rate.
00;03;25;04 - 00;03;51;02
Dan Naylor
So that can pay less contributions, which is which which is a good reason to do it. And typically trustees will want some sort of, you would think, some sort of benefit improvements. So if you talk about that scheme, one scheme in surplus, they're unlikely to be able to access that surplus absent some sort of corporate action, some decision taken to wind up the scheme and potentially some some sort of decision under under the winding up rule to allow money to be spent on benefits in that winding up scenario.
00;03;51;09 - 00;04;17;16
Dan Naylor
So typically you'd see a conversation between the trustees of the transferring scheme and the corporate long lines of, well, if we agree to transfer and improve the funding level of receiving scheme, we would want some sort of immediate benefit for our members of that. That's typically the conversation that that would happen. The other question you asked is about is about changing the rules of the scheme around potentially when surplus is something we touched on when we have a podcast and obviously when you've already got a surplus, it's a very difficult thing for the trustees to agree to change the rules.
00;04;17;21 - 00;04;38;25
Dan Naylor
Now there will just be some surplus rules that can't be amended. The amendment itself will include a restriction on changing the surplus rule, but if there isn't that sort of restriction in there, then I don't think there is a barrier too to properly advise trustees agreeing to to to amend the surplus rule to potentially remove the ability to eliminate benefits if there is a surplus on winding up.
00;04;39;01 - 00;05;07;04
Dan Naylor
And trustees might want to do that in a scenario where they would see that as being a barrier or a barrier to the corporate feeling comfortable to put the money into the scheme the trustees would want in there. So it is not going to be a conversation that lots of trustees and sponsors have. But but if that is something that's genuinely if being a factor in the corporate mind in not putting money into a pension scheme, then it seems to me, as the trustees could properly consider it, and there might be circumstances, it would be appropriate for them to agree to that.
00;05;08;07 - 00;05;31;24
Eimear Kelly
Yeah, absolutely. And just kind of then I suppose going back to the corporate and that sort of they're sort of maybe reticence to put cash in if they think it's going to get spent on, you know, augmentations and stuff like that, you know, are there scenarios where, you know, where a scheme has no immediate cash needs that, you know, that can be a contribution holiday or transfer to another DVD scheme?
00;05;33;01 - 00;05;59;13
Dan Naylor
I think I think well, I think clearly that that there will be scenarios like that. I think the other thing we're expecting to see increasingly is, is scenarios where corporates are looking at schemes that have have surplus in them already. So it's it's in that scenario we've got a scheme of a surplus and the scheme is underfunded, but potentially looking to use schemes in surplus on a funding basis, potentially even schemes like I say, in surplus on a viable basis as a way of applying that value to to fund future service benefits.
00;05;59;13 - 00;06;15;25
Dan Naylor
So we're seeing quite a lot of that in the marketplace looking to add in DC sections into Divi schemes. You know, these things are cyclical. You know, we see a whole load of people put these sections into DB schemes, made these hybrid schemes transferred all the DC benefits out to master trusts. Now they've got surpluses to try and put DC benefits back into schemes.
00;06;16;02 - 00;06;36;07
Dan Naylor
So we're seeing a lot of that sort of thing at the moment. And there will be circumstances in which trustees can properly advised consider all the right things and agree to that sort of thing. But again, you know, if you're using money that's already in the pension scheme for to to fund some sort of future service benefit on a different basis, again, covenant is going to be key as always.
00;06;36;11 - 00;06;54;13
Karina Brookes
Yes. Because I think, you know, for both sets of scheme, both schemes, if you looking at different schemes in the group, one less well funded and one that might be seen to be an immediate covenant benefit, I guess to the scheme that's less well funded, but the scheme is more well funded. You're going to need to make sure you've got that absolutely secure covenant underpin that.
00;06;54;23 - 00;07;07;20
Karina Brookes
It's allowing you to take those different decisions. Potentially you've run the scheme on for longer, not by the benefits immediately and so on. So that can be a really important factor. And we've talked about some of those different covenant options and in other elements.
00;07;08;05 - 00;07;29;25
Dan Naylor
In relation to that start scenario where you're looking to give an incentive to the transferring trustees, very often that incentive takes the form of some sort of sort of short term improvement in benefits, maybe some sort of cost. You know, the current cost of living increase, additional cost of living increase, which always involves that interesting sort of sort of pay off between sort of security for accrued benefits and a little bit of extra benefit now.
00;07;30;00 - 00;07;36;21
Dan Naylor
And that's I think there's quite a lot of conversations that will happen around surplus that involve effectively that same sort of same decision.
00;07;37;10 - 00;07;57;27
Eimear Kelly
Yeah, absolutely. I actually just on that cost of living point, you know, are you saying or are we saying many scenarios where there is requests for discretionary benefit augmentation in the likes of, you know, the cost of living crisis and then the inflationary pressures people are under and pensioners in particular.
00;07;57;27 - 00;08;21;27
Dan Naylor
I've seen lots of requests. I've not seen a lot in many, many responses saying yes, from from the co-op perspective, obviously, will all rules are different. You know, there might be some schemes out there where trustees have got unilateral discretion on unusual. Typically what we're seeing is is is trustees approaching approaching corporates and saying, you know, we've had requests from members or there's a feature built into pension scheme rules.
00;08;22;02 - 00;08;40;11
Dan Naylor
It's not unusual for a pension scheme increase rule to require the trustees to tell the employer if inflation is running ahead of any cap that applies on pension increases and in that sort of scenario. So lots of I have seen sort of requests from trustees to come up and say, please, please, can we, you know, would you like us to spend some some some surplus on a funding basis on some discretionary increases?
00;08;40;27 - 00;08;42;26
Dan Naylor
I haven't seen corporates take a.
00;08;42;26 - 00;08;50;15
Karina Brookes
Tricky one, isn't it? Because obviously quite often they're not paying their existing workforce who may not be members in fact of the defined benefit scheme a pay increase.
00;08;50;15 - 00;09;12;22
Joseph Wren
That's yeah I think we have to be really mindful of that. Don't in the current environment this is very difficult for a lot of a lot of sponsors. We have very high energy costs, we've got very high inflation, we've got interest rates which are high. There's a lot of headwinds on the on the sponsor side. So I think a lot of these questions as well have have, you know, an almost commercial and political elements to it as well.
00;09;12;23 - 00;09;19;09
Joseph Wren
But actually, what does this look like in the context of the whole business and the whole group overall and all of its different stakeholders?
00;09;19;27 - 00;09;45;09
Eimear Kelly
Absolutely. And that almost feels like it could be a podcast in itself for next time, Ira. Thank you, Carina, Joe and Ethan. So that lines up this podcast series. Certainly a lot of things to think about. And you know, I think what I would say is each situation is unique with its own particular fact pattern with, you know, different issues to be worked through.
00;09;45;09 - 00;09;58;21
Eimear Kelly
We hope that those listening have found this useful. And thank you. Thank you for your for listening. If anybody has any feedback or would like to discuss any of the issues raised by Nat, please do reach out to one of myself, Karina, Joe or Dan.
