Defined benefit pensions: Addressing the problems without the hassle

Defined benefit (DB) pension schemes can place a huge financial strain on UK businesses. Getting to grips with the issues, and then addressing the underlying problems, can require a significant time commitment both from sponsoring employers and trustee boards.

Aon has been working with clients to consider how some of the lower level pension decisions and time intensive projects can be delegated to others to free up time to focus on pension strategy or other areas of the business. For larger organisations this might mean seeking greater support from pensions managers, HR functions or other subcommittees within the business. However, a number of clients have told us these resources are already over-utilised or simply don’t exist.

To help clients in this situation Aon has introduced Implemented Consulting. This is a new way of working to enable companies and trustees to better focus their time on setting wider pension strategy, with Aon tasked to deliver on agreed actions, making lower level decisions on the clients’ behalf (within agreed parameters) in order to limit the need for ongoing involvement from company and trustee representatives.

This Implemented Consulting framework has already had huge success, including:

  • Enabling companies and trustees to execute key strategic actions such as liability management projects to deliver significant savings, but with very limited management time.
  • Implementation of full pension strategy. Once upfront objectives have been agreed with trustees and company, Aon will develop a full plan for approval, taking in to account budget and risk constraints – and then implement this in the most effective way – minimising ongoing management time, but maximising value.
  • Improved governance. Full day trustee meetings have been compressed into two to three hours by focusing agendas on key decisions, with others taking ongoing responsibility for delivering against day-to-day actions.

Implemented Consulting in action

Aon was recently appointed to conduct a pension increase exchange (PIE) exercise (an offer to members to reshape their pensions on terms that effectively brings forward pension income but which reduce the overall costs to the company). Running these types of projects can be hugely beneficial both for members looking to enjoy a higher income in the earlier years of retirement and indeed to the company in reducing pension deficits.

However, these projects can be time intensive. This was a real problem to the company and trustee representatives who had a number of pressing business matters to attend to. To address this problem it was agreed Aon would use the Implemented Consulting framework; running the whole project for the company and trustees once the high level parameters had been agreed upfront, and being empowered to take lower level decisions over the course of the project to make this happen. On the client’s behalf Aon performed the detailed design of the offer, prepared communications, agreed the accounting approach with the auditor, project managed the exercise and liaised with other third parties including administrators, the IFA and the legal advisers.

The exercise was a huge success – generating a £3 million gain to the P&L net of fees (roughly double that targeted at the outset) with the time involvement for the trustees and company limited to just one meeting. The costs of the exercise were paid for from scheme assets given the aim of the project was to improve the funding position – the company therefore bore no direct fees. As an added benefit, the bulk of the exercise was executed over a four-month time frame – quicker than it might have under a traditional advisory approach.

“The key aims were delivering the outcome required, meeting the timetable, achieving the company’s accounting requirements, all with very limited time input form the company. All these aims were met and from the company perspective the project ran seamlessly with involvement limited to a few key decisions.”
Company FD

A growing trend

This governance approach is nothing new. It’s been tried and tested for execution of pensions investment strategy over the last five to 10 years in the UK leading to Aon now supporting pension schemes with over £100 billion assets on a fiduciary management basis globally and in turn, leading to trustees and companies now seeking for the delegated model to be widened into traditional pensions advice.

The future

Implemented Consulting will not be right for all schemes. However, for those with limited internal resources it can significantly reduce the amount of management time spent on pensions, whilst still delivering high value results. In a world where time is an increasingly precious commodity and DB pensions continue to become a legacy issue we expect this framework to become the way in which many organisations will want to approach their DB arrangements.

Andrew Grime, principal consultant, Aon
+44 (0)113 291 5078

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