De-risking: don’t just pick the flavour of the month option

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LONDON – Wednesday 18 December 2013 – Pension scheme sponsors and trustees should not just pick the flavour of the month de-risking option, such as a bulk annuity or longevity hedging transaction, but consider other options as part of a journey plan, according to Towers Watson. The firm says 2013 has been a record breaking year for transactions with over 160 bulk annuity or longevity hedging transactions covering over £14bn of pension liabilities so far, but is advising clients to also consider other options in 2014.

Ian Aley, head of pension risk solutions at Towers Watson, said: “While not wanting to criticise the appropriate use of bulk annuity or longevity hedging transactions, particularly as we have been involved in many of them, they have become ‘flavours of the month’ at the expense of a number of other suitable de-risking options, which haven’t been properly considered, such as Retirement Transfer Options.”

According to a recent Towers Watson survey of pension schemes, only three per cent have used Retirement Transfer Options* so far, while 30 per cent expect to have this option in place within the next three years. The firm suggests other popular de-risking solutions to watch in 2014 include Pension Increase Exchanges** and investment strategies such as diversification, inflation and interest hedging, dynamic switching between different asset classes; all coupled with careful management of implementation and on-going costs.

Ian Aley said: “Just as DNA differs from one person to another, each scheme sponsor and trustees have unique goals, profiles and risk tolerances which ensure that two schemes should have the same plan. Scheme sponsors can be confronted with a spectrum of options and the temptation is often to simply choose one after only considering the big ticket items. However, implementing any single option only makes sense if the full picture has been considered.”

Towers Watson suggest that pension scheme sponsors and trustees should work to understand the risk levels being run in the scheme if they are to work out which de-risking option is most suitable. In addition it says the various options cannot be implemented all at once, as some deliver short-term gains and are relatively easy to implement, while others need meticulous planning if they are to succeed.

Ian Aley said: “We’ve seen the strain on sponsors’ ability to maintain pension contributions during a recession. Now that economic conditions have improved and capital market losses pose less of a threat, there is a danger that some sponsors will move on to other priorities as the scheme no longer hurts. However, now is exactly the time that schemes should think about their future direction so that they won’t be as vulnerable to a future financial downturn.”

Notes to editors

*Retirement Transfer Option: allows members to transfer defined benefit pensions just before retirement to access a wider range of options which might better suit the member’s circumstances. For example members can select the levels of pension increases and spouse’s benefits which they would like. In addition, members may be able to take a higher tax free cash sum and those with pensions meeting the Minimum Income Requirement could draw down their fund as taxable cash.

**Pension Increase Exchanges: allows members to change non- statutory pension increases (usually on pension built up before 6 April 1997) for a higher flat pension within the defined benefit scheme.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management.

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