Creating a bespoke solution for a global engineering and manufacturing firm

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.

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.

This is a marketing communication. This document contains marketing material about our fiduciary management service. This document does not represent impartial advice on this service. In certain cases, you are required to conduct a competitive tender process prior to appointing a fiduciary manager. Guidance on running a tender process is available from the Pensions Regulator. 

Important Information

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.

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

This information is issued by SEI Investments (Europe) Limited (“SIEL”), 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This document and its contents are directed only at persons who have been categorised by SIEL as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook. SIEL is authorised and regulated by the Financial Conduct Authority. This material is not directed to any persons where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever. No offer of any security is made hereby.

Whilst considerable care has been taken to ensure the information contained within is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. SIEL is the distributor of the SEI Funds which are authorised in Ireland pursuant to the UCITS regulations and also serves an investment manager and/or fiduciary manager for clients who invest all or a portion of their assets in such Funds. SIEL provides the distribution and placing agency services to the Funds by appointment from its associate, the manager of the Funds, namely SEI Investments Global, Limited, a company incorporated in Ireland (“Manager”). The Manager has in turn appointed another associate, as investment adviser to the Funds, namely SEI Investments Management Corporation (“SIMC”), a US corporation organised under the laws of Delaware and overseen by the US federal securities regulator. SIMC provides investment management and advisory services to the Funds. Any reference in this document to any SEI Funds should not be construed as a recommendation to buy or sell these securities or to engage in any related investment management services. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application must be made solely on the basis of the information contained in the Prospectus (which includes a schedule of fees and charges and maximum commission available). Commissions and incentives may be paid and if so, would be included in the overall costs. A copy of the Prospectus can be obtained by contacting your Financial Advisor, SEI Relationship Manager or by using the contact details shown on the previous page.

Past performance is not a guarantee of future performance. Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying internal investments to go up or down. Investors may not get back the original amount invested. SEI Funds may use derivative instruments which may be used for hedging purposes and/or investment purposes.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events.