Partnership approach with private equity transforms pension liability

Summary

SEI worked closely with a global private equity firm as part of a combined effort to transform the funding of defined benefit pension schemes for one of its company holdings, cutting dramatically the risk posed by pension liabilities obscured by governance shortcomings.

Our team played a proactive role with the owner to drive the fiduciary management mandate overseeing two defined benefit pension schemes—£80m and £20m—on behalf of the trustees of the business, which operates in the military aviation sector.

It’s a story of how we not only supported an asset owner—with deep governance knowledge of its own—in creating greater value in its business portfolio, we but did so with a clear process. As a result, we delivered positive performance for the benefit of its trustees and members over the last two-and-a-half years.

Challenge 

The priority for the business owner was to improve the investment performance and funding level of both schemes, which were previously overseen by the same asset manager. The oversight of the largest was on a conventional consulting basis and the smaller by fiduciary management mandate.

The owner’s principal concern was to empower trustees to take a more informed grip on the direction of the schemes. To do so, they would need to both ask more searching questions of their advisors and to be able to identify clear markers as to performance, liability, and long-term projection.

They also sought a more inclusive, holistic approach from trustees in their interaction with the sponsoring employer. We ensured not only informed questioning but fostered a more visibly inclusive approach so every stakeholder could view and understand challenges met and progress made.

Solution 

SEI were appointed to the mandate following a competitive tendering process in August 2019.

From the beginning, our team was able to demonstrate better historic performance, keener costs, and greater efficiency but it was the visibility which transformed understanding.

By using client-specific benchmarks pegged to its cash flows, both trustee and sponsor could see how this impacted on and helped to plan the member journey. This was a marked improvement on the previous benchmarking methodology: proxy valuation based on generic portfolio. Other improvements included replacing with an equally effective alternative, an expensive segregated derivative portfolio to manage downside risk.

Even while funds were transitioned during the depths of the pandemic in March 2021, costs were kept down while maintaining effective exposure and hedging risk. At this point, funding levels also climbed beyond expectation to gilts plus 3.5 per cent, out-performing benchmarks.

Had the funds not been de-risked, they would have fallen by this same percentage had they remained invested where they were.

Conclusion

By working closely across the spectrum of this pension scheme’s stakeholders, we are able to demonstrate that, two-and-a-half years visible, positive progress has been made for all concerned. Performance means trustees and members now have greater confidence in the security of both present and future benefits. The private equity owner can also see the reduced size of the pension liability of its business holding on its asset balance sheet.

Important information 

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.

This is a marketing communication. 

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