Pension Planning – An Occupational Defined Benefit Scheme In £200 Million Deficit

Person filing documents
February 28th 2014, Martin Wilcocks

Last July I took 2 chaps from Sei – the global investment manager that provides our in-house investment platform, to see a long standing contact who is now the retired  Managing Director of a manufacturing company. He is now Chairman of the board of Pension Trustees. Yesterday we had lunch at a very nice Italian Restaurant in Liverpool Il Forno. 

The Trustees have been outsourcing the Pension Fund capital to around 20 investment managers over the last few years. Nothing special, more the usual suspects - L&G, Aviva, Aegon etc. 

The fund is worth £350 Million!

It is supporting approximately 7000 members, around half of which are in payment, and the other half are deferred members waiting to hit their retirement age, so these other members will at some stage in the future also become in payment members. 

Now, because of the way the Government calculate scheme liabilities, it says the scheme is in deficit by around £200 Million. So by their calculations, it should be worth more like £500 Million in order to meet its liabilities over the next 10 – 20 years.

Just to repeat, this is because of the way the Government calculates deficits. Very conservatively.

As a side point, around a year ago Jeremy Clarkson commented on live television, I think from memory it was The One Show, about what he would do with public sector workers, who were complaining about having to up their contribution levels, on their gilt edged final salary defined benefit retirement plans. 

His suggestion, whilst  not pleasant, was as I heard it, exaggerating the point that these people simply had no idea just how valuable a scheme like theirs was, and on that he was spot on. I mean the capital required to mirror the benefits of a Government Pension, or indeed one like its private sector equivilent as in this example, is astronomical. Like off the scale astronomical. 

Anyway back to where we were. Under the guidance of the Pension Regulator, The board has appointed an Independent Trustee to sit alongside the 7 other trustees.

The pension regulator would prefer the scheme to go into the pension protection fund. This would obviously not be great for the members, and future members waiting to be paid, as their benefits would be reduced. By some way and we think this could be by around 50%.

We don't feel this is necessary, and neither does the retired MD and Chairman, or the board.

Having 20 everyday typical fund managers is not accelerating the job of reducing the deficit, and the management simply focuses on investment management, charges its circa 0.6% annually and the wheel just turns year on year. It's nothing special.

Naturally the scheme has benefited from decent growth over the last few recovery years, but to be frank a 12 year old investing into tracker funds could have secured the average returns that these 20 fund managers have. It's like a false bubble. What will happen if and when we see a correction in markets next time around? It's likely that these investment managers fund pots will simply drop in line with markets. 

The scheme would be far better off with fiduciary management and if deployed / engaged with Sei, we believe the deficit will reduce at a far greater rate of knots than if left under the current noise of 20 fund managers all having a go with circa £17 or so Million each. 

Fiduciary management will pick the scheme up, and manage its assets, control its tax position and also the investment strategy. It is a far deeper and more complete solution. The proof is in the pudding and Sei have the case studies to boot from 40 UK clients that fiduciary management is working for. And they have £174 Billion under management. It works. Sei works.

Fiduciary management will pick the scheme up, and manage its assets, control its tax position and also the investment strategy. It is a far deeper and more complete solution. The proof is in the pudding and Sei have the case studies to boot from 40 UK clients that fiduciary management is working for. And they have £174 Billion under management. It works. Sei works.

The pension fund manager has just recently retired. He was and remains positive about fiduciary management. My client and contact the Chairman is a fan of fiduciary management. Even the independent Trustee is a fan. The actuary Aon Hewitt is a fan.

The regulator isn’t. This is immensely frustrating as it is the only cog in the wheel stopping this scheme from catapulting forwards.

Who would have thought that a Government department would be holding back this potentially positive step forwards.

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