Step 5: Making buyout-aligned investment decisions

Andre Clarke

Vice President, Investment Consulting
(Wednesday, Aug, 17, 2022)
|   3 mins

Despite recent market volatility, a combination of strong long-term returns across growth assets, company contributions and, latterly, real interest rate increases have resulted in improvements across the funding levels of many defined benefit pension schemes on an endgame basis. With the endgame now in sight, trustees have begun to turn their attention to what a suitable target might be and how to get there.  

For lots of schemes, buyout is seen as the ultimate endgame objective. But how do you decide whether it’s right for your scheme and what the next steps are once you have? In this blog series, we’ll be guiding you through the six steps to buyout to help you navigate your journey. If you need any support along the way, please get in touch.  

Step 5: Making buyout-aligned investment decisions

Our buyout blog series has set out a lot of food for thought when it comes to endgame planning and preparing for buyout. But with so much to think about, how are you as trustees supposed to ensure you’re making considered decisions that are aligned with a buyout objective? That’s where we come in! We’ve developed a Buyout Risk Management Framework (BRMF) – the endgame cousin to our Pension Risk Management Framework – to support key stakeholders in this process.

How might your decision-making need to change as you approach buyout?

On your journey to the endgame, tracking whether your scheme has sufficient expected returns to achieve your long-term objective is key to monitoring progress. Once there, however, this becomes less important. As your scheme approaches full funding, the focus moves to stabilising the achieved progress and potentially building a buffer against unforeseen adverse changes, as well as either matching the buyout market/specific insurer’s price to transact or meeting the required outflows for the scheme, depending on the goal.

So, how can you align your decision-making to your buyout goal?

Our proprietary framework, the BRMF, supports trustees in making buyout-aligned investment decisions. The BRMF is an intuitive, one-page dashboard designed to keep all stakeholders on the same page as your scheme approaches, and indeed reaches, a fully funded buyout position. It sets out key metrics relevant to your scheme’s buyout journey which are rated Red/Amber/Green to highlight any divergence from your objectives.

In practice, our frameworks are always tailored to each scheme’s specific objectives and constraints, but most BRMFs typically monitor the following:

  • Is the scheme on track to achieve buyout by the target date?
  • Are the assets suitable for transaction?
  • Is member data in good enough shape to transact?
  • Is there sufficient flexibility in the strategy should the endgame objective change?

What about the possibility of buy-ins?

Whether or not a buy-in (or a series of buy-ins) would be suitable for your scheme ahead of a buyout is dependent on your scheme’s individual circumstances. Buy-ins are typically put in place to manage longevity risk when a scheme is some way from achieving a fully funded position on a buyout basis, but there are other associated benefits too:

In addition to the BRMF, we’ve developed a Buy-in Assessment Framework which can be used alongside your existing risk management tools to help assess and monitor whether a buy-in is appropriate and feasible for your scheme.

The areas this Buy-in Assessment Framework covers include:

  • What buy-in pricing is required to allow the scheme to still meet its funding objective?
  • What is the impact of the buy-in on risk?
  • Would there be sufficient collateral in the portfolio following a buy-in?

Now you’ve got your scheme where it needs to be, how do you actually transact?

The first five blogs in this series have guided you through the buyout process, from deciding whether buyout is suitable for your scheme to getting your portfolio buyout-ready. In the last blog of this series, we’ll discuss the final stage: transacting a buyout.

Unless indicated, these are the views of the author and may differ from those of the firm.


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