Corporate DB: time to simply stop doing some things and save £££s?
Summary
Given better funding and simpler investment arrangements could you do less, spend less and leave more for members and other stakeholders? We think the answer is 'Yes’. By making some sensible adjustments to the running of your scheme, a saving of at least 25% in costs is a fair target.
Background
Pension scheme governance structures, resources, plans, activities and so on have generally built up over years, layer upon layer. Often as a legitimate response to regulation and other demands. Could it be time to declutter whilst saving time and expense? We think so.
The catalyst for our view is the sudden and marked improvement in funding, and two decades of de-risking. If 5-10 years ago a full Board, Committee and sub-committee strata was fit to manage (say) ten units of financial risk, that risk is probably now about 1-2 units.
Consider this example. In 2020 a £1.5bn scheme, with liabilities of £2bn hedges £1bn and has 30pc in risk assets. It has £0.5bn deficit funding risk, and market risk about the same again. As of today, the scheme will now be smaller (about £1bn), overfunded, fully hedged, with almost no exposure to risk assets. The number of assets classes and managers will be fewer. It's a much smaller and simpler 'problem'.
We posit that the same, historical cycle of meetings, activities and expenditure, is no longer necessary. Of course there is work to be done, including decisions to be made and overseen, but governance and resourcing should be right-sized. The prize is a leaner operation, with more financial resources available to members and other stakeholders.
The following are areas where a scheme might look at saving time and money:
Frequency of Investment Committee meetings
Existence of sub-committees and working groups
Complex and 'shiny' reports (e.g. simplify TCFD, Implementation statements)
Frequency and detail of investment performance reporting
Receiving market reports and commentary
Frequency and detail/complexity of Covenant Reporting
Effort and complexity in Actuarial funding work
Use of software packages etc which now have limited application
In-house resources deployed in non-added value activity• Reducing the number of fund management mandates
Reducing the complexity of fund management mandates
Using less expensive third parties
How much might realistically be saved, and Why Avida?
We posit that a reduction in activity, and by inference expenditure, of at least 25% may be possible.
Our advisers were all senior executives in the pensions sector, who have, in the past carried out studies of activity in their own pension schemes. They have experience of repointing their in-house teams or negotiated substantive fee reductions in legacy arrangements. Some have achieved much deeper savings, so this indication (i.e. 25%) may be conservative.
