Moving from Joint Trustee to PCST and solving funding issues

Context

The scheme was a legacy hybrid scheme with closed DB and DC sections. Asset value was circa £600m with circa 6,000 deferred and pensioner members, very few of whom were employed by the current sponsor. The sponsor was a subsidiary of a large US corporate with global presence and strong covenant.

The DB section was fully funded on a very conservative basis and was invested entirely in gilts; however, the DC section has an underpin which caused a volatile deficit in the overall funding level.

The challenge

The sponsor was keen to re-risk the scheme to bridge the gap to buy-out via the investment strategy and to enable the DB underpin issues to be addressed. A number of company appointed trustees had retired from the Board and the sponsor was struggling to find volunteers to take on the roles. There was no in-house resource to fill the pensions manager function, which was largely carried out by one of the company appointed trustees. The trustee advisers were also adding to costs and causing lack of clarity in terms of delegation and overall governance.

Our approach

We were initially appointed as Chair of the Board and worked with the trustees and the advisers to agree a long-term funding strategy which involved taking a limited amount of investment risk in return for an increased guarantee from the US parent. We also secured the pensioner liabilities with a buy-in contract and used the remainder of the DB assets to invest in a segregated LDI portfolio alongside a small equity allocation. Meanwhile, we continue to work with the sponsor to reduce risk within the DC sections subject to the underpin.

Once the strategy was agreed, the sponsor decided to move to a Professional Corporate Sole Trustee (PCST) model to reduce the governance burden and to solve the problem of finding company appointed trustees. IGG engaged in the process and provided a detailed scope for both trustee and governance services following which we were appointed to replace the incumbent trustee board and provide ongoing governance to the scheme.

Due to IGG’s existing role as Chair of Trustees we were able to manage the transition extremely efficiently including the softer issues such as management of the resignation of the member nominated trustees and consideration of replacement with a governance oversight body, as well as the legal and administrative aspects around the transfer of assets etc.

The outcomes

Following the appointment, IGG reviewed and re-structured its adviser appointments to reflect the new structure and for more efficiency. We continue to hold quarterly trustee meetings with the sponsor and the trustee advisers alongside more focused, smaller meetings on particular topics, which enables progress to be made more quickly.

Since our appointment, we have successfully refined and reviewed the DB strategy in line with our long-term target and have a small surplus in that section. We have also carried out a full review of the DC section’s default strategy in order to reflect members’ retirement needs and incorporate ESG considerations.