History is full of quotes about taking, or missing, opportunities. My personal favourite is from Roy Chapin Junior, former CEO of the American Motor Corporation.

Although many of the larger schemes have well-established trigger frameworks in place, we estimate that less than 10% of small schemes have an effective de-risking framework in place.

Now is the time for schemes to review their funding positions and consider whether to put in place triggers to capture future opportunities.

Markets have been very challenging for over a decade. The benchmark 20 year gilt yield has reduced from 4% at the start of 2011 to below 1% at date of writing. This alone has added 80% to liability values. 

On the flipside, the low interest rate environment has helped equity markets. Since 2010, global equities have increased by 190%. Most other asset classes have performed well although not to the same extent.

Schemes with a significant allocation to return assets have seen an improvement in funding - often bolstered by deficit contributions. The challenge is to identify these opportunities and act quickly when the funding position is ahead of plan.

A key issue here is the time horizon for seeking return, where the two main factors to consider are:

·      The time horizon is reducing constantly as members retire and schemes mature.

·      Knowing how long we can rely on the employer covenant for. In many cases there is significant uncertainty over longer periods.

In short, there will be opportunities but time is running out. Trustees must get into a position to take advantage of these opportunities and act quickly or schemes may be left in a weaker position in the future

Strategic framework – a clear idea of how the investment strategy will evolve over time as the scheme matures. This includes the allocation to matching and return seeking assets, hedge levels and cashflow requirements.

Triggers –pre-defined trigger funding levels should be based on an objective funding measure, like the long term funding target or buyout position.

Pre-agreed protocol – to ensure opportunities are not missed, a pre agreed process for de-risking is required. Effectively, this is an instruction in advance to reduce risk in a pre-defined way if the funding position reaches a certain level

It is tempting to set triggers in large steps to lock in significant improvements each time a trigger is hit. However, you are less likely to hit bigger trigger ‘steps’ leading to a higher level of regret risk.

The number and level of triggers should be tailored to the scheme’s circumstances, including the funding position and market conditions at the time triggers are set and Employer views on using gains to reduce risk rather than reduce contributions.

H1 2021 saw a 0.5% increase in gilt yields followed by an equity market rally. This led to a sharp improvement in funding for schemes with a significant allocation to equities. 

For this particular scheme, we had put in place a series of funding based triggers and 2 of these were hit between February and May, each leading to a 10% reduction in the return seeking allocation. The transactions were completed within 48 hours of the triggers being hit. As a result, the scheme accelerated its journey plan by 3 years and reduced overall risk by 20%.

During Q2 2021, we identified an improvement in insurer pricing which meant some of our clients could be in a position to complete a full buy-in.

Opportunities like this are not mechanistic due to the subjective nature of insurer pricing where market competition and individual insurer appetite can have a significant impact.

By staying close to the market we are able to identify these opportunities. We also ensure our clients are ‘transaction ready’ in terms of data and benefits so we are able to move quickly when opportunities arise.

Eight of these cases – ranging in size from £5m to £80m - are proceeding to a full buy-in transaction before the year-end.

The big question for trustees and employers is not whether opportunities will come up, it is whether you will be ready to take advantage when they do.

We believe many smaller schemes are in a position to de-risk now but are unaware due to a lack of close monitoring. That’s why we recommend that schemes talk to their advisors as soon as possible about putting the right structures in place to capture future opportunities.

As author H. Jackson Brown, Jr. said "Nothing is more expensive than a missed opportunity". 

Jonathan Seed, Scheme Actuary and Head of Pensions Strategy, Cartwright