Liability management exercises, such as enhanced transfer values (ETV) for deferred members and pension increase exchange (PIE) for pensioners, have become increasingly common over the last few years. There was a lull in activity prior to the Code of Good Practice for incentive exercises being published in June 2012. However, the launch of the Code means that employers can now push ahead with confidence, albeit with a number of design and communication challenges to work through.
These exercises can be effective in reducing or re-shaping your company’s pension liabilities, although their impact will depend very much on the specifics of your pension plan. This should be a “win-win” situation, as a well-designed exercise will, for some of your members, provide a valuable option that is more attractive than the normal benefits offered by the plan. However, a badly designed or implemented exercise will put your company at risk of financial loss, regulatory censure or reputational damage.
Both the market research and our own experience have shown that companies are frustrated and put-off by how much it can cost to carry out the most basic ETV or PIE feasibility analysis. When you consider how much flexibility underlies the design and how sensitive the modelling results can be to changing inputs and market conditions, fees can quickly mount up to inappropriate levels. It’s only then that a company finds out whether the exercise makes commercial sense!
Of typically even more interest to employers is the possible introduction of new retirement options, for active or deferred members when they reach retirement. Usually these include giving retiring members a PIE option and, sometimes, an option to transfer, or partially transfer, their benefits out of the plan (for example, to take advantage of the flexibility whch the Minimum Income Requirement provides). As the introduction of new retirement options does not involve a one-off exercise and is not covered by the Code of Good Practice, such options are much cheaper and easier to implement than an ETV or PIE exercise.
At bac, having helped a range of companies look at ETV, PIE and retirement options, we recognise that these exercises can be of value to some but not all companies. That’s why we believe that companies should be able to test them for their own circumstances at a reasonable and fixed cost.
Through our industry-leading mosaic software, we offer a fixed fee solution that will enable you to design your own ETV/PIE exercises and new retirement options. You can test their feasibility by modelling the financial impact on your plan, the members and the company (although if you prefer, and for the same fee, we can produce the results for you).
If you then decide to move ahead and implement a liability management exercise or some new retirement options, we can help you there too.