Mercer gives advice on de-risking pension schemes

When it comes to de-risking pension schemes, companies should be weary of paying too much for risk reduction, remaining over exposed to future risks and failing to vet providers properly, warned Mercer.

The warning comes at a time of significant volatility in investment markets and continuing change in the line-up of providers who bid to take on pension risk from schemes.

Andrew Ward, a consultant in Mercer’s financial strategy group, said: ‘Trustees and sponsors need to set clear objectives in terms of risk reduction – and the price they are willing to pay for it – in order to avoid costly errors.’

He added that volatility in the credit markets is having an upward affect on providers’ prices: ‘They are certainly becoming more selective in deciding whether to quote.’

‘Even where the price is right’, said Ward, ‘it makes sense for some schemes to retain some risk. For sponsors in particular, a bulk annuity means giving up the possibility of future investment gains. For some, the best solution may be to retain a degree of risk.’

He continued: ‘Pension scheme sponsors and trustees need to conduct thorough due diligence to satisfy themselves as best they can that any provider they rely on for future pension payments is both operationally and financially robust.’

‘Provider instability – whether financial or operational – could result in delays in pension payments and unforeseen credit risk.’

He added: “Current pensions in payment generally represent the lowest risk, which explains why providers are so hungry for this business.’