Scheme Funding Negotiations | Barnett Waddingham

Trustees are required by law to take advice from their scheme actuary on funding matters, and to examine the employer's 'covenant' when setting contribution requirements. Employers are often left in an unequal bargaining position by having no access to specialist advice when negotiating with trustees.

At Barnett Waddingham we provide a totally independent employer advice service. Our aim is to empower scheme sponsors in their negotiations with trustees, thereby allowing them to regain some control. This can range from simply explaining the funding process and trustee issues to the sponsor, to structuring bespoke financial solutions to deal with specific needs.

In any event, the solution should take account of the commercial reality of the negotiation whilst allowing trustees to carry out their responsibilities at the same time.

The Triennial funding valuation is also a good opportunity for the sponsor to think more widely about its ultimate aim for the pension scheme. We work with sponsors to help them formulate their ideas in this area, for example:

Setting a secondary funding target open on a ‘self – sufficiency’ basis, with asset and liability density the trigger based on this measure;
Developing an 'exit plan' with an appropriate timeframe and the sponsor’s cost and risk constraint. The 'exit plan' generally involves setting all the members' liabilities outside of the scheme; and
Providing a contingent asset to the trustees with the intention to reduce cash contributions to the scheme in the short-to-medium-term.

Supporting funding to a multinational company

One of our recent activities involved providing support to a multinational company which acquired a UK operation with a large (>£3bn) DB scheme several years ago through a historic transaction.

We provided support to the company in its negotiations with the trustees during the triennial valuation process.

This involved keeping the management team, based in Europe, up to date with developments in UK pensions, analysing and challenging assumptions and figures prepared by the scheme actuary, exploring alternative scenarios with the company and preparing a counter-proposal and support during meetings with a trustee sub-committee.

As part of the analysis we were able to demonstrate that, under the trustees’ proposed funding plan, the scheme could potentially be fully funded on a buy-out basis ahead of the end of the proposed recovery period. As part of the counter-proposal to the trustees we helped develop a framework which could be used to manage the funding level of the scheme towards a buy-out position over a longer time horizon. One of the conclusions reached was that it would be more efficient to target a buy-out once the majority of deferred members have retired, to avoid having to purchase deferred annuities which tend to be much more expensive compared to immediate annuities.

We also worked closely with our investment team, who are also advising the company, in developing the counter-proposal. They used cashflows provided by the scheme actuary to prepare an analysis of the progression of the funding level over time which the company was able to use as part of the counter-proposal. The investment team also carried out an analysis for the company to give them a better understanding of the interest rate, inflation and credit risks inherent in the trustees’ investment strategy which highlighted potential areas where further de-risking could be considered.

The negotiations were challenging as our analysis provided good evidence for the company to pay reduced contributions. The strategy adopted by the scheme had served it well over the three years to the valuation date and the position had improved. The trustees were reluctant to accept a reduction to the current level of contributions and the matter was further complicated because the scheme actuary has a role in setting the contribution rate.

The end result was that although the company was unable to secure an extension to the recovery period it was able to negotiate down the deficit and secure a significant reduction in total contributions. The company was also able to secure a cap on future contribution requirements should the deficit increase at the next valuation (which is effectively an undertaking to extend the recovery period in the event of adverse experience).

Find out more