Has ‘People’ just become your biggest investment risk? We think so. The question is what should you do about it?
For closed DB schemes, pension funding levels are now high, with buy-out or low dependency in sight. Pension teams need to adapt – even become smaller, or re-point. The demand for expert staff may become acute, albeit possibly on a temporary basis as schemes migrate to buyout. These forces may be a catalyst for staff churn. ‘People’ may now be your biggest investment risk.
Background and rationale for assertion
The corporate DB pensions landscape is at an inflexion point. Running coincidentally with regulatory encouragement, many schemes were targeting buy-out, or low-dependency ‘within about ten years.’ Sufficient time to clean house in due course, you’d have thought...
But if ten years was realistic, that has now shrunk five years – at least in terms of funding level (A prior blog described how funding level and readiness to transact are different things, and thoughts on team design along the way).
Pension teams were typically built to deal with complexity and challenge across multi-assets and risk. Despite ongoing maturity, the ‘DB problem’ still felt like it was growing. Schemes sought complexity and illiquidity as a source of diversity or return. Private markets was a common ‘play.’
We now expect target portfolios to be much simpler. Funding, covenant and economic investment risk will fall markedly. Complex, illiquid and growth assets need to be sold down, or recycled into income bearing investments of lower risk. Given the end to sponsor contributions, paying pensions and keeping LDI portfolios means that cash planning will be king.
Now we hit the bit everyone knows about but isn’t openly discussed.
Pensions professionals in their mid- to late-fifties may be looking to retire or develop a portfolio career. Others may be looking to develop a career outside pensions – for example, the burgeoning wealth market, with growth and more complex assets the natural focus. Furthermore, life events always cause a moment of reflection, often the catalyst for change.
This author has direct experience of recruiting pension professionals in the last three years – it was very, very, difficult!
Risk professionals talk a lot about resilience. HR professionals talk a lot about development and succession planning. With respect to pension teams supporting corporate DB pensions, we posit that these aims may need to be revisited.
Teams needed to manage a transition to buy-out will be very exposed to key-person risk. Large schemes targeting low dependency will likely need quite a different shape and focus of team – but nonetheless will face into greater risk arising from staff churn. Might that a smaller team be able to deal with an LDI rates or similar exogenous shock? – it's worth asking the question.
A word about DC is merited. It might be possible to reassign staff working on DC schemes to DB and vice versa – to help manage the overall people risk. But in truth these are very different skills and career paths, and so we confess scepticism.
So, what can be done?
We know each scheme is different, but suggest considering:- Being clear about what you’re targeting:
- Buy-out or Low-dependency o
- Investment strategy – mix of assets, hedging
- Your transition plan – especially how long -
- In house resource v external
- Balance of in-house resource – skills, experience, headcount
- At what stage (e.g. after buy-out you don’t need much!)
- ‘Right-sourcing’? Partnering?
- Interim executive support?
- Retention plans, integration with DC resource
How we can help
Avida can help support schemes through this transition by advising on appropriate resourcing models, operational circuits and governance structures. If necessary, Avida can also provide expert project and temporary headcount support.