Four lessons to be learned from the road to securing telent’s record breaking buyout deal
In September 2019, telent Ltd hit the headlines when it was announced that the trustees of its DB pension scheme had overcome huge headwinds to secure a £4.7 billion full-scheme buyout deal – the largest the UK has seen to date.
What wasn’t documented though, was the journey that they had taken to get there.
After it became necessary to sell the majority of its business in the mid 2000s, Marconi repositioned itself as telent, emerging as an SME attached to a large pension scheme. When the financial crisis hit in 2007, the Trustee responsible for the scheme (Stanhope Pension Trust, SPT for short) found itself faced with an extremely difficult challenge: Securing member benefits by closing a material funding deficit when the sponsor (whose annual revenues were less than the shortfall in the pension scheme), didn’t have the financial resources to make significant further contributions.
With recent news flow documenting the challenges facing DB schemes and the potentially devastating impact for members if the worst case scenario happens, this unique story demonstrates how, with careful planning, it is possible to turn things around – in this case saving c. 40,000 pension scheme members from facing potentially significant pension cuts and an otherwise viable company being put under a level of financial strain which threatened its continuing existence.
Having worked closely with SPT as their investment advisers since 2008, we see four key learnings to be taken from this journey.
1. Constructive people working together has power
When planning for the endgame, it pays off many times over to invest in governance and have the right people doing the right things in the right set-up. This case demonstrated that having the right mix of personalities around the table is just as important as technical expertise.
SPT had a well-balanced board made up equally of member-nominated, company appointed and independent trustees. When recruiting, individuals were chosen specifically with a view to create a diverse group of people willing to challenge each other constructively. This was then combined with a small and nimble in-house executive team, focusing on the implementation of strategic decisions in close collaboration with advisers.
SPT also used a committee structure to focus on specific areas in depth, but with a strong link back to the main trustee board. For the investment committee (IC), this was achieved specifically via a strategic framework approach, which enabled clear accountability for the IC whilst still allowing it to have the delegated authority to make meaningful decisions in a timely manner. More specifically, the framework made it easy for the IC to identify when decisions had to be referred to the board, namely whenever there were changes to the fundamental strategic parameters (e.g. targeted funding date and risk budget). However, within the given strategic parameters set, the IC was fully authorised to make decisions on how best to achieve these based on its broad based subject matter expertise. This freed up the main board to focus on the big picture, and it meant that sophisticated investment solutions could be implemented nimbly to support long-term member outcomes.
The most important factor of all though was that everyone involved remained focused on the high-level objectives determined by the trustee with the support of the sponsor and evidenced in the strategic framework. The trustee consulted the sponsor from outset, whilst retaining full control of the strategy, and responsibility for implementation and day-to-day management of the scheme.
What the SPT case shows is that everyone pulling in the same direction creates real momentum over time, allowing you to create big results with limited resources.
2. Focus on the big picture
Any given pension scheme, no matter its size and situation, is subject to these limited resources whether in terms of human or financial capital. You therefore have to prioritise strategic decisions that will make a genuine difference to long-term member outcomes. Implementation is important, but only to the extent that it supports the big picture outcomes.
SPT used a strategic framework to consistently evaluate every single decision through the same lens, and to understand its true added value in the context of long-term objectives and member outcomes. Decisions were always driven from a top down perspective to avoid the tail wagging the dog, and to ensure that everything was tied into supporting a single overarching objective. This way the trustee created a “snowball effect” of many small, but consistent, decisions leading to real momentum over time.
The trustee monitored progress against the strategic framework at every single meeting, with calls to action flagged immediately if something was off track. This ensured the highest level of accountability of both trustees and advisers, as well as timeliness in decision-making.
3. Managing risk means taking back control
Robust risk management gives you greater control over your journey and safeguards success against external factors, reducing the reliance on ‘luck.’ It means that you as a trustee are in the driver’s seat and you can have a high degree of confidence that there will be no surprises down the line.
For SPT, having to call on the sponsor beyond the already agreed deficit contributions was considered a key risk, as it could have pulled the sponsor and scheme into a death spiral. The Trustee therefore devised a risk budget specifically around the goal of minimising the risk of this happening, and they evaluated all investment decisions through the lens of this metric. Whatever your risk budget may look like, it is important that it fully reflects your scheme’s specific situation including the sponsor position – there is no one size fits all.
4. Prepare prepare prepare
When an insurer comes onto the scene, it may be necessary to move quickly. Early preparation is the key to securing the highest level of flexibility and bargain power in the negotiation process, in turn increasing your desirability in the market and reducing the risk of surprises down the line.
Onerous as it may seem, undertaking a full data cleanse and legal and benefit reviews can change the picture hugely. It’s important to work with specialist advisers to complete these before even going to market.
A review of liquidity and transferability of assets should also be completed at an early stage, with sales terms and contingency disposal plans established for assets that it is not clear whether the insurer will take as part of a deal. It’s unlikely the insurer will be keen to take any illiquid assets no matter their nature, so the prudent approach is to assume that all such assets will have to be disposed of. Make sure you are in a position to allow insurers access to detailed asset information at the early stage of going to market, so there will be no surprises down the line.
We’ve often been asked if this was a case of pulling off the impossible – if schemes facing similar struggles can genuinely achieve the same positive outcome. Though unique, this case simply goes to show that, by having clear objectives from the outset and by sticking to your guns, there’s nothing to stop any scheme from overcoming a bad hand and securing a better outcome for its members.