Integrated Pensions Balance Sheet

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The successful financial management of defined benefit pension plans involves reconciling the respective interests of scheme sponsors and plan members. In the past, companies and trustees have generally been able to find satisfactory compromises, but in the current economic climate pressures on many sponsors to balance the interests of multiple stakeholders, including the need for continual investment in the business for future growth, demands from holders of debt, shareholder returns and the needs of pension schemes, make this ever more difficult. From the trustee perspective they are faced with significantly larger deficits and risk levels, as well as frequently weaker covenants. This is further set against a backdrop of increasing regulatory pressures.

The Integrated Pension Balance Sheet (IPBS) brings together a quantitative assessment of a scheme’s assets, liabilities, risk and the employer covenant:

  • the liabilities and risk exposure – reflecting a measure of the downside “risk” elements within the assets, inflation risk, longevity risk, etc.
  • the assets, both now and in future – including recovery plan contributions, returns on assets and possibly yield reversion.
  • the covenant – what is the security behind the strategy to meet pension obligations, including any existing contingent protection put in place.

In some ways it’s a very simple idea, but it can really bring clarity to complex situations and provide a framework for all parties to agree a range of risk management strategies. The recent announcement of the Pension Regulator’s new DB strategy and investigation into the IORP Directive and Sponsor Support quantification, illustrate the continued exploration in the wider market of linkages between covenant, funding and investment risk.

IPBS is not just for a one-off assessment, but can form a central pillar for the ongoing monitoring and management of scheme risk. As deficits and investment exposure change, and covenants improve/ deteriorate, the overall position of the scheme can be very volatile. We believe our clients need to know how their scheme risk position changes, and importantly, what action they can take along the way to mitigate poor outcomes and take advantage of opportunities.


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