Sole Trustee: Effectiveness for rapid de-risking

Here, Anna Eagles looks at effective de-risking using an LDI strategy for a sole trustee client

Scheme background

LawDeb is Sole Trustee to a Defined Benefit Scheme with a strong employer covenant and a guarantee from the Employer for buy-out funding.

This guarantee meant that the investment strategy was fairly aggressive with 50% of assets in return seeking assets, 25% invested in investment grade Corporate Bonds and 25% in UK Government Bonds. Funds had weekly dealing dates, so could only be traded once a week.

The triennial valuation results were discussed and agreed at a Consultative Meeting six months after the valuation date. It showed a £10m deficit on a Gilts basis.

Why de-risk?

The employer was looking to focus on integrating an imminent acquisition, and decided to commit cash now to fund the Scheme fully, but wanted to reduce volatility significantly immediately.

Time-critical solution

LawDeb Sole Trustee worked with the Scheme Actuary and advisers to show the benefits of LDI to achieve the Company’s goals and to agree how to transition the return-seeking assets and deficit contribution in the immediate short term to provide interim hedging until a suitable LDI strategy could be put in place.

Our effective solution also considered liquidity and cashflow needs, given future monthly Company contributions would cease.

The timeline for delivery

Time from Meeting  Action Taken
8 days

Scheme actuary provided:

  • Confirmation of cash contribution needed for full-funding, allowing for six month period since valuation date
  • De-risking investment advice
  • Valuation documents
9 days Conference call to consider investment advice and agree Recovery Plan, Schedule of Contributions and Statement of Funding Principles.
Valuation documents agreed and signed by Trustee
12 days Valuation documents signed by Employer. £10m deficit contribution paid to Scheme.
13 days Alternative investment proposal advice for implementing de-risking received, considered and agreed by Trustee in consultation with Employer
15 - 34 days Transaction documentation agreed, signed by Trustee and issued to investment manager
20 - 43 days Transactions implemented over four dealing dates to reduce market risks

The outcome

A well-funded, risk-reduced pension scheme with significantly reduced volatility. The fact this was achieved so swiftly meant there was breathing space to seek appropriate advice to consider long-term investment strategy. In addition it left the employer able to focus time and resource on acquisition initiatives, safe in the knowledge that the Scheme is in a strong and stable position.

Michel Abaza, Safran Group

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