Scheme and sponsor background
A global engineering and manufacturing firm dealing in electronic systems and components.
Following a competitive tender process, SEI was appointed fiduciary manager in June 2013 for one of the sponsor’s UK defined benefit schemes, and then again in June 2014 for a further two schemes. The three schemes were at different stages on their strategic journeys and had different funding level objectives.
The key characteristics and objectives of each scheme
Common objectives for all three schemes:
- Improve funding levels
- Receive advice and guidance on areas where trustees lack specialist knowledge and experience
- Nimble decision making within a robust governance framework
How SEI met the specific needs of each scheme
SEI conducted an in-depth asset allocation study for the three schemes. Using an integrated risk management approach (IRM), this began with an analysis of their risk tolerance, return requirements and objectives.
Following our analysis, and initial discussions with the trustees and sponsor, SEI designed solutions for the three schemes which shared the following common elements:
- Substantial hedging of interest rate and inflation risk through the use of bonds and derivative instruments
- Implementation of a journey plan (de-risking plan) to de-risk the schemes as and when the funding level improves
- Delegation of manager selection and replacement, dynamic asset allocation and execution of the journey plan to SEI
SEI also urged the trustees of schemes 1 and 2 to venture beyond addressing their stated objectives and instigated discussions about secondary objectives such as self-sufficiency and buyout/buy-in.
How SEI engaged with the trustees of each scheme
For all three schemes we formulated an annual service plan based on their needs and objectives. This included the scheduling of quarterly meetings to discuss and review performance, operational and service levels. As you would expect, the frequency of meetings was greater in the early stages of our relationship and also around triennial valuations. The bespoke service plan also included the provision of face to face training. For instance, although the trustees of scheme 3 were well informed about many of the technical aspects of our proposed investment strategy, they were keen to improve their knowledge of Liability Driven Investment LDI). As a result we organised a half-day LDI workshop at their offices which was extremely well received. We also organised a half-day training covering alternative asset classes for the trustees of scheme 2.
How SEI helped the individual schemes with their issues and challenges
Our tailored and proactive approach has delivered tangible benefits to all three schemes.
Scheme 1: Primary objective: Reduce funding level volatility
As a result of greater diversification and a customised LDI strategy the funding level of this scheme improved over time. Funding level triggers were breached, allowing us to substantially de-risk the scheme. As a result of this significantly improved position, we completed buyout in June 2019.
Scheme 2: Primary objective: Reduce reliance on sponsor contributions
This scheme completed a buy-out in 2017, helped by a significant funding level improvement.
Highlights of the process:
- 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 had been secured, there was still residual cash, which may now be used to cover other administrative expenses and the cost of winding up the scheme.
Scheme 3: Primary objective: Reduce funding level volatility and chances of requiring additional contributions
The scheme remains less well funded than schemes 1 and 2. However, through reductions in risk, a significant increase to hedging and strong portfolio performance, it has moved far closer to reaching its technical provisions objective.
Summary of results for all three schemes
How SEI managed conflicts across the schemes
As a result of significant funding level improvements in scheme 1 the trustees, led by SEI, began preparations for a buyout. SEI proactively considered the potential conflicts that may have arisen as a result of buyout on the other two schemes. If for instance, the buyout required a significant cash injection this may have worked to the detriment of the other schemes in terms of a potential weakening of employer covenant. However, following our analysis it transpired that the buyout would not require additional cash from the sponsoring employer, and therefore would not negatively impact the two remaining schemes.
Benefits of using SEI as a single fiduciary manager across multiple schemes
There are a multitude of benefits to using a single fiduciary manager across different schemes, of which the following stand out in the context of this solution:
Despite being different sizes, the schemes benefited equally from SEI’s vast scale and resources. For example, we offered a common fiduciary management fee based on the total assets of all three schemes, which resulted in a cost saving.
- Dedicated team
By using a dedicated team across multiple schemes and a single point of contact in the “SEI Portfolio Manager”, this allows for synergies in communication and training. For example, trustees across multiple schemes have taken part in education sessions with SEI encapsulating areas of common interest to the trustees such as LDI and alternatives.
Economies of scale
Our asset size, currently £258 billion in assets under management*, meant that we were able to provide all schemes with efficient and lower-cost exposure to a range of asset classes, investment styles and investment managers that would otherwise be closed to them. All three schemes received fully customised asset allocations reflecting scheme specific cash flow requirements.
- Independent view overlapping all Schemes
By serving as a fiduciary manager for all three schemes, SEI served as an additional independent point of view to the trustee board. This lead to greater challenge of pre-existing ideas and complemented the existing actuarial advice that the trustees had received to date.
This case study demonstrates SEI’s ability to customise solutions for multiple schemes with the same sponsoring employer, and its proactive approach to identifying and managing conflicts. In addition to benefiting from SEI’s economies of scale, all three schemes have reaped tangible rewards from SEI’s client-centric approach. Most importantly of all, our solution has helped to ensure a better outcome for the schemes' members.
*As at 30 June 2020
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