In this episode of The Professional Investment Podcast I am joined by Claire Altman, managing director of pension risk transfer and individual retirement at Standard Life. She chose Professional Pensions’ coverage of a Hymans Robertson survey showing most defined benefit members are open to run-on.
Claire says this story shows the complexities involved in both framing survey questions correctly and ensuring members have access to all the facts before they decide whether it more beneficial for the scheme to be bought-out or to run on.
We discuss the regulatory arbitrage which exists between pension schemes and insurance companies – Claire explains insurance companies must manage their risk to ensure that they will survive if a 1 in 200-year risk while a pension scheme does not have such a requirement.
She explains there three key areas of risk a scheme needs to assess – asset, covenant and liabilities. All of these areas need to be assessed before a scheme can say whether run-on or buy-out is the better option.
While schemes are usually good at assessing assets and covenant risks, they can be less accurate about liabilities. Liability risk covers three areas – longevity, data and legalisation.
Ensuring a scheme has dug every box out of the archives and made sure they have an accurate picture of all the promises made to every scheme member is the place to start.
Getting a handle on this will help a scheme to figure out its longevity risk. Insurance companies are working to help schemes better manage this risk, she added. Legislation risk is tougher to assess.
We ended the podcasting discussing the pros and cons of both buy-out and run-on while also asking whether pension schemes can really take advantage of their regulatory flexibility given their desire to protect their current funding position.
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