MANAGING FUNDING RISK IN DEFINED BENEFIT FUNDS Paul Williams Joanna Combrink

Introduction A pressing issue – and why? Structure of session: Legal/regulatory treatment Sources of funding risk Managing funding risk: Meeting the cost of benefits (ongoing fund scenario) Conversion of benefits from DB to DC Pensioner liability

Legal and regulatory treatment of funding DB funds Pension Funds Act s7C(2)(f) – fiduciary duty S16 – valuation S18 – scheme to return fund to financial soundness S14 – financial soundness of transfers S12 – financial soundness of amendments Financial soundness – regulatory treatment PF66 Draft guidance note on financial soundness PF117 (surplus)

Sources of funding risk Distinction between funding past and future service benefits Factors impacting on funding issues: Economic factors Mortality Salary increases Past service: Looking backwards: experience v assumptions Best estimate v solvency funding Future service – looking forward: anticipated future experience

Managing funding risk 3 scenarios: Meeting the cost of benefits - ongoing fund scenario (actuarial valuation reveals deficit) – dynamics between trustees and employer Conversion of benefits from DB to DC Pensioner liability – in particular outsource to long-term insurer

Ongoing scenario – how to meet the cost of DB benefits Starting points: Fund rules s18 PFA/PF66 Trustees’ position if employer cannot/will not meet balance of cost? Trustees’ duties Can trustees adopt alternative assumptions suggested by employer? Can trustees pay pensions at below the rate in the PIP? Can trustees weaken the pension increase policy? Can trustees amend the rules to reduce future service benefits?

Conversion of benefits from DB to DC What must trustees do when faced by a proposal? Compulsory or optional? In-fund or new fund? Transfer basis: Enhancements Trustee considerations Meeting cost of conversion

Managing funding risk in respect of pensioners In-fund pensions: concerns for trustees Separate pensioner and active member pools? Align investment strategy – de-risk – but cost Ultimate de-risking = purchase of annuity (outsource). Issues: How to meet the cost? Asset split: duties to actives and pensioners Fund’s name or pensioners’ names? Insurer and policy terms

Winding-up the fund Liquidation v deregistration

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