Ian Aley explains how to create an effective journey plan for pension schemes

Journey planning is a well-worn phrase - but are pension scheme sponsors and trustees really in control of the end destination and how to get there? Many will have a journey plan in place but it is important to combine this with an awareness of the on-going risks and the options available to deal with these.

Is it enough to blindly follow the Sat Nav which was programmed at the start of the journey? Trustees and sponsors need a fully developed, dynamic plan enabling them to take decisive actions and to respond to opportunities and risks as they arise.

Below are four simple steps to a successful journey:

1. Define the objectives
It is important that the objective is clearly defined and that the views and aims of both sponsor and trustees are aligned. Common objectives include:

• Self-sufficiency – there should be clarity around what this means to ensure it is understood by all parties and whether it really represents a ‘risk free’ basis. Is it intended to only address the asset risks or should other risks including longevity, operational, regulatory and data also be addressed?
• Technical provisions – whilst this may be set as a long-term target, what happens when it is reached? Is a new target set or do the technical provisions evolve to become closer to buyout?
• Buyout – often this represents the ultimate target but how is it to be reached and what are the milestones along the way?

2. Risk measurement
A fundamental stage in preparing a journey plan is to understand and analyse the risk levels currently being taken within the scheme. Consideration can then be given to agreeing an appropriate level of risk to accept, both now and at various points along the journey plan. As well as an initial assessment of risk, it is important to establish an on-going risk measurement mechanism to give advance warnings of possible diversions to the planned journey.

3. Formulate a plan
With a robust risk measurement mechanism the trustees and sponsor can regularly assess the options available to manage both asset and liability risks, their relevance and the cost/reward associated with each option.

This analysis enables the trustees and sponsor to build and re-test a plan outlining the actions to be taken and when they expect to take them. The plan should allow flexibility, for example being able to react decisively if market conditions become attractive or other developments occur.

Trustees and sponsors should obtain regular updates on available de-risking options and associated market conditions, for example bulk annuity price monitoring. If the journey runs over a number of years it is sensible to regularly update the maps used by the Sat Nav rather than relying on the original factory programming.

4. Be prepared
Actions will often need to be completed in a tight timeframe so careful preparation is likely to pay off:

• Data should be made fit for the purpose envisaged in the journey plan. For example, if a buy-in or buyout is anticipated at some stage, accurate data will help negotiate a better price. Reviewing the legal documentation and clarifying the benefits can lead to a more efficient, less costly transaction.
• Is there sufficient flexibility within the assets held to execute the plan quickly when the time is right?
• Do scheme governance and record keeping present any barriers to executing the plan? For example, ensuring all parties are in agreement on what needs to happen and who has authority to act.

When markets offer a good opportunity within the agreed parameters of the plan, decisive action should be taken.

A well-considered journey plan that incorporates decisive actions and can adapt to changes over many years is essential in helping sponsors and trustees reach their ultimate goals. Schemes with a fixed journey plan may be left watching in the wings as others take advantage of opportunities and negotiate through the diversions that may appear along the way.

Ian Aley is a senior consultant at Towers Watson

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