Creating a Bespoke Solution for a Global Engineering and Manufacturing Firm

Creating a bespoke solution for a global engineering and manufacturing firm; find out how their funding level progressed

The Organisation

A global engineering and manufacturing firm dealing in electronic systems and components. SEI was appointed fiduciary manager in June 2013 for a defined benefit scheme belonging to one of the group’s UK subsidiaries, and then again in June 2014 to a further two schemes for a separate UK subsidiary. We also manage one of the group’s US schemes. The UK schemes were using a traditional investment consulting model and turned to our fiduciary management solution for a more dynamic and customised approach.

The Challenge

The two pension schemes that SEI was appointed to manage in 2014 both had small funding-level surpluses (102% and 108% respectively) on a prudent actuarial basis(1). However, given their maturity profile—a significant proportion of the schemes’ members were already drawing their pensions—they experienced high levels of funding-level volatility owing to the mismatch in interest rate and inflation sensitivities of assets and liabilities. The trustees were eager to address this issue and adopt a more dynamic approach to the management of the schemes’ assets, one in which the term and nature of the liabilities were incorporated into the overall investment strategy.

The trustees selected SEI as fiduciary manager for both schemes after a comprehensive and competitive procurement process. They were impressed by our 20-plus-year track record of fiduciary management in the defined benefit market. It was also important that we had experience selecting and monitoring investment managers and managing complex scheme structures, as the company’s defined benefit schemes included many customised elements.

They were impressed by our 20-plus-year track record of fiduciary management in the defined benefit market.

The Solution

Our Institutional Advisory Team conducted an in-depth asset allocation study for the schemes, beginning with an analysis of their demographics, funded status and risk tolerance. They also examined the existing asset allocation lineup, including a thorough review of existing managers.

Following our rigorous analysis, and further to discussions with the trustees and sponsor, we designed solutions for both schemes which comprised the following key elements:

  • Substantial hedging of interest rate and inflation risk through the use of bonds and derivative instruments
  • Implementation of a journey plan to de-risk the scheme as and when the funding level improves. This demonstrated its worth in January 2015 when one of the schemes breached a funding trigger level and SEI de-risked the scheme according to pre-agreed parameters
  • Delegation of manager selection and replacement to SEI

We also urged the trustees and sponsor to venture beyond addressing their stated objectives and instigated discussions about secondary objectives such as self-sufficiency and buyout/buy-in.

The Results

Our tailored and proactive approach has delivered tangible benefits to both schemes. The smaller of the two has recently completed a buyout, helped by a significant improvement in funding level.

Key highlights of the process for the smaller scheme:

  • We worked closely with the scheme’s other advisers, which included lawyers, actuaries and their preferred insurance providers with the aim of ensuring more efficient and effective outcomes.
  • We restructured the investment strategy, dialling down risk in an effort to minimise portfolio volatility relative to the insurance premium. The remaining asset classes were invested in liquid vehicles and thereby convertible to cash at short notice should the need arise.
  • After the buyout liabilities had been secured, there was still residual cash, which can help cover other administrative expenses and the cost of winding up the scheme.

The funding level of the second scheme has risen to c.120% since June 2014(2).

During this period, a funding-level trigger was breached, allowing us to substantially de-risk the scheme. As a result of this significantly improved position, we are in discussions with the trustees regarding the implementation of a framework that aims to enhance the scheme’s prospects of meeting its buyout target goals.

Case study performance

 

Legal Note

Net of fees. Past performance is not a guarantee of future performance. The Legacy Strategy represents simulated performance.
Performance of the SEI Strategy represents an actual client track record, representing an asset allocation implemented through our UCITS
Funds with the inclusion of investment strategies as a result of our enhanced advice. The performance illustrated is reflective of the time
period from the client’s first investment with SEI and reflects changes in allocations. SEI treats every client individually, therefore these
results may not reflect the impact material economic and market factors, within the timescale stated, may have had on SEI’s decision
making if a different client mandate was being managed.
The Legacy Strategy is designed to replicate the client’s portfolio prior to transitioning to SEI. It was created using the client’s prior asset
class allocation matched to the closest SEI Fund based on asset type. This does not reflect the actual performance that would have resulted
had the client stayed in its original investments and does not incorporate any adjustments to allocations or recommendations that may have
been made to the client’s portfolio had it remained with its previous provider.

Allowance has been made for deficit repair contribution inflow and benefits payment outflow from the portfolio. Liability projections and
inflation assumptions used with each Strategy are identical. This information is as at 31 December 2016 for illustrative purposes only.

Important Information
This case study focuses on the experience of a specific client; other’s results and/or experiences may vary.

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