By Matt Simms, Director of Solutions at P-Solve
At a recent Association of Professional Pension Trustees Dinner Seminar my colleague Ajeet Manjrekar gave a short presentation on Integrated Risk Management. Thank you to APPT (www.appt.co.uk) for inviting us and Columbia Threadneedle for hosting.
Ajeet laid out three key questions that Trustees need to answer:
- What is my funding goal today?
- What return do I need to get there?
- What risks could blow me off course?
I’ll take that first question and show why it is important but in future articles we will explore the other two questions.
What is my funding goal today?
The obvious funding goal for all Trustees is full funding on a Technical Provisions (“TP”) basis. Monitoring the funding level progress to achieve this objective may look similar to the chart below.
The black line shows the Flightpath based on the target return of the investment strategy, in this example the target return to outperform the liabilities by 1.8% p.a. The green line shows the actual progress to date, which has been good so we are ahead of plan. This leaves the gold line as the required return to get to full funding by March 2026 from where we are now. As we are ahead of plan this required return has dropped to 1.4% p.a. above the liabilities.
But… is full funding on (the current) TP basis the only funding goal, is it the end game, do we just target what is needed to get there and then stop? Of course not, for starters the TP basis is going to change through time and as we get towards this objective it makes sense to consider a stronger funding objective (I’ll save for another time some thoughts on whether this should be self-sufficiency or buy-out ).
So let us now look at the same funding level progress chart but showing a stronger funding objective (in this example a self-sufficiency basis in a further 5 years).
On this stronger funding objective we are still ahead of plan, the required return is 1.6% p.a. above liabilities, but not as far ahead of plan as on the TP objective which needed 1.4% p.a. outperformance of liabilities.
If we were just considering our progress on the TP basis we could have de-risked to target the 1.4% above liabilities. However doing so would have taken our eyes off the prize of reaching a stronger funding objective.