P1.1 Don’t fear complexity: overcome it


Monday, Jan 25
|   20 mins

Getting a pension scheme over the line to full funding is complex, but it can be achieved. By identifying the factors that will make the biggest difference to achieving your goals, you can conquer complexity and gain the clarity you need to begin your journey to full funding.

The ‘This Way’ series walks you through the steps all trustees can take today, to move them closer to where they want to be.

The first step

Your journey to full funding begins by taking a step back, getting out of the detail of the actuarial reports, investment consultant updates and covenant reviews, and asking the right high-level questions:.


  • Where do you need to get to? What is the “right” end point or long-term funding target for the scheme?


Try and picture the future and where you really want the scheme to be. This “right” end point is not what you can afford today, nor what feels comfortable, rather it is where the scheme should be aiming to secure member benefits.


  • How long do you have to get there? How long can you rely on your sponsor to support the scheme? When will you start to become significantly cashflow negative?


These are stark and potentially uncomfortable questions, but the more realistic you are in your assumptions, the more helpful it will be. It might be that you need to get to a “safe” place quickly or you can afford to take a slower, steadier route.


  • What contributions can you reasonably rely on?


Another tricky question, and another that is specific to each scheme. Get as much information as you can about how this might change in the future – from both members and sponsors – and take a moment to challenge what you think you already know.

The next step

Once you have answered these questions, you can work out the investment return you need, and how long you have to reach your funding goal.

In a perfect world, this investment return will feel comfortable and achievable within risk levels that the sponsor can afford to underwrite. However, this is often not the case. If the investment return you need looks too high or results in too much risk, you may have to zoom in a level and ask yourself another three questions:

  1. Can you increase contributions to bring down the investment return you require?
  2. Can you push out your time horizon?
  3. If you can push out the time horizon, how can you mitigate the covenant risk you are introducing by doing so – or is there a way to get alternative security?

This may be an iterative process but it will allow you to identify the combination of time, contributions and investment return that will give you the best possible chance of achieving your funding goals.

The next, next step

Now you are ready to plot a course from where you are now to where you want to be – even if it feels a long way off.

By taking a step back and setting out your highest-level context, you gain clarity on what you are relying on to achieve your funding target – and what deserves most of your attention.

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