1. MANAGING FUNDING RISK IN DEFINED BENEFIT FUNDS
Paul Williams
Joanna Combrink

2. Introduction A pressing issue – and why? Structure of session:
Legal/regulatory treatment
Sources of funding risk
Managing funding risk:
Meeting the cost of benefits (ongoing fund scenario)
Conversion of benefits from DB to DC
Pensioner liability

3. Legal and regulatory treatment of funding DB funds
Pension Funds Act
s7C(2)(f) – fiduciary duty
S16 – valuation
S18 – scheme to return fund to financial soundness
S14 – financial soundness of transfers
S12 – financial soundness of amendments
Financial soundness – regulatory treatment
PF66
Draft guidance note on financial soundness
PF117 (surplus)

4. Sources of funding risk
Distinction between funding past and future service benefits
Factors impacting on funding issues:
Economic factors
Mortality
Salary increases
Past service:
Looking backwards: experience v assumptions
Best estimate v solvency funding
Future service – looking forward: anticipated future experience

5. Managing funding risk 3 scenarios:
Meeting the cost of benefits - ongoing fund scenario (actuarial valuation reveals deficit) – dynamics between trustees and employer
Conversion of benefits from DB to DC
Pensioner liability – in particular outsource to long-term insurer

6. Ongoing scenario – how to meet the cost of DB benefits
Starting points:
Fund rules
s18 PFA/PF66
Trustees’ position if employer cannot/will not meet balance of cost?
Trustees’ duties
Can trustees adopt alternative assumptions suggested by employer?
Can trustees pay pensions at below the rate in the PIP?
Can trustees weaken the pension increase policy?
Can trustees amend the rules to reduce future service benefits?

7. Conversion of benefits from DB to DC
What must trustees do when faced by a proposal?
Compulsory or optional?
In-fund or new fund?
Transfer basis:
Enhancements
Trustee considerations
Meeting cost of conversion

8. Managing funding risk in respect of pensioners
In-fund pensions: concerns for trustees
Separate pensioner and active member pools?
Align investment strategy – de-risk – but cost
Ultimate de-risking = purchase of annuity (outsource).
Issues:
How to meet the cost?
Asset split: duties to actives and pensioners
Fund’s name or pensioners’ names?
Insurer and policy terms

9. Winding-up the fund
Liquidation v deregistration

10. THANK YOU