Pension de-risking: The latest opportunities from around the world

We're particularly grateful for having three client speakers with us today. We have LeRoy House, who is responsible for Pensions Management at ABB, Raymond Yerkes, Associate Director for Pension and Benefits in the Finance function at Ford Motor Company, and Clare Smith, who is VP of Global Pensions at Amcor, although Clare today will be speaking in a personal capacity, sharing her perspective of a long career in pensions and pension derisking.

And also joined with me today-- two colleagues, David Finn and Nathan Pavlik, both of whom have extensive experience of supporting multinationals in derisking pension plans around the world.

In terms of the order for today, in a few minutes, I will just make a few general remarks around the current position of the global economy and where we find ourselves at this point in time. Then my colleague David Finn will lead the panel discussion. And then David will ask Nathan a few key questions to share some of the recent developments that we've been seeing around the world.

As Bridget mentioned, we will conclude with the Q&A session. And to raise questions, please do this via the chat button. Submit them at any time. And those questions we have time for, we'll cover, and those questions we don't, then we will address separately individually after this call.

So in terms of where we are in the global economy, if we look back over the last couple of years, then the topic of price inflation has really dominated the economic picture. We've seen very high levels of inflation going throughout the last two years, rising up but now starting to come back in some of the economies. So the US is leading the retreat, but the eurozone is also falling back, whereas the UK and other countries still have relatively high, stubborn inflation.

As a result of that high inflation, central banks, whether it's the Federal Reserve, the ECB, or the Bank of England, for example, have been raising their short-term rates. And whilst the Fed paused last week, the ECB did raise rates, and it's expected the Bank of England will also raise rates again this week.

Although those rates are short-term rates, what the market is starting to anticipate is that those short-term rates won't endure for the longer term. So this second chart we're showing is the 10-year government bond rate, and we have seen some fallback in those rates in recent weeks.

Now, of course, rising rates actually means lower liabilities, and that potentially has good news for those that are looking to settle liabilities. But unfortunately, whilst the liabilities are lower, so are our assets. And the chart on the right-hand side just shows the quarterly investment performance of a benchmark plan part of our global asset watch study.

Here, we can see that, in 2022, there were three negative quarters of negative returns. Since then, the last quarter of 2022 and 2023 have shown improved performance. Whilst assets are not back to the levels they were prior to 2022, they certainly have made some progress towards that, and we'll see we'll talk about that in a second.

I think despite this market uncertainty and volatility, as you'll hear later on today, it's still been an environment in which been possible to settle liabilities and transfer those to third parties. And so despite uncertainty, there is definitely an opportunity still to continue the journey of derisking.

If we look forward now-- and we have relied on our investment colleagues to help with this analysis-- our sort of basic position is that demand and supply conditions remain out of balance. And as a consequence, there is uncertainty as to the future development of inflation, interest rates, and growth. And therefore, the position in the rest of 2023 and 2024 remains uncertain and potentially volatile.

We sort of see three potential scenarios going forward. The first one is a smooth rebalancing, so otherwise the soft landing where job openings and wage growth decline, and gradually, inflation falls alongside. In tandem, interest rates hit a peak and then can come back. And that doesn't really have too much impact on growth.

The second scenario is where basically wages and inflation are much more sticky, remain elevated for longer. And as a consequence, interest rates remain high, and that has a negative impact on growth.

And the third scenario is that the level of monetary tightening already occurred or required still to keep inflation under control causes a deep downturn. That creates labor imbalances in the opposite direction. And therefore, interest rates and inflation fall rapidly, but we are in a tough economic situation.

And I think the way certainly the US asset market, in particular, equity market, is pricing at the moment, it feels that there is much more weight being placed on scenario A. I think the WTW highest view is that there certainly should be some more weight put onto the possibilities of a scenario B or a scenario C. And I've said before, notwithstanding uncertainty, there's certainly been opportunities to continue to the derisking journey and settle liabilities. And we would expect those opportunities to remain in the future.

So before I pass over to David to chair the client panel, I'd just like to share three scenarios. Bridget, could-- OK. Sorry. I'd like to share these five categories of derisking and how we see derisking, because we'll use these categories later on in the presentation as well.

So there's five interventions that can be done to address derisking. First of all is plan design. Many companies have tackled the shift from DB to DC, but there was also, beyond that, changes to accrual formula or expecting members to contribute more. So all of these have the ability to reduce the risk for the company.

The second one is around cash funding policy, so effectively, advance funding beyond what's required in the minimum. And you have a good example of that might be Germany, where actually nothing is required for book reserve plans. And so we have seen a trend where companies are increasing contributions.

The third category is asset derisking, where, collectively, companies can reallocate the assets that are held to back those liabilities to more uniformly hedge the risks. So liability-driven investments or reductions in return-seeking assets is a way of matching assets to liabilities.

The fourth category is a liability transfer to members. So effectively, this is where members take the responsibility for the planned benefits going forward-- so bulk lump sums, for example, in the US; enhanced transfer values of PIE, Pension Increase Exchange, opportunities in the UK-- are ways of transferring the liabilities from one member to-- from the plans to the members.

And then finally, the company can offload those liabilities in their entirety to a third party with a buy-in or buyout or transferring the whole plan to a DB master trust if those exist in the market. And similarly, longevity swaps are another way of transferring some of the risks associated with these plans. So with those five categories in mind, I'll pass over to David to chair the panel.

DAVID FINN: Thanks very much, Chris, and good morning, good afternoon, everybody. And thank you very much again to Lee, to Raymond, and to Clare for joining us for this webcast.

So we've got a number of questions that we'll ask our panelists to talk through and to give a perspective on what they're observing in their world in terms of decision-making and strategy for pension risk management, in particular, managing defined-benefit risks. And we'll start with Lee, and then we'll work through the different participants.

So, Lee, in your work with your company, what point are you at, in terms of the journey of pension risk management, through the five different categories that Chris just described-- plan design, cash funding, asset derisking, liability, transfer to member or to a third party? And here, we're looking for an historic view. What have you done so far? What's your thinking? And what's the current position for you at ABB?

LEROY HOUSE: Sure. Thanks, David. So a bit of a short background on ABB-- so our pension footprint today is around $6 to $7 billion worth of pension assets, liabilities, with the recent high watermark around $12 billion. Our pension footprint's largely in Switzerland, US, UK, and Germany. And until recently, we had quite large plans in Norway, Finland, and Sweden, and then after that, quite a long tail of other countries around the world.

So to manage the defined-benefit risk of these plans, we have a three-pronged strategy which encompasses the five pieces you have here. We call it contain, hedge, shrink. So contain, close, freeze defined-benefit plans to reduce the future liability growth, hedge risk control asset strategies, and then shrink the two last ones, so reducing the pension footprint with opportunistic strategies to transfer pension obligations to members or other third parties.

So on plan design, we made a pretty good progress in the past, say, probably 20 years. And we're working through the last few plans and countries where it's permissible to switch to DC. However, we're cognizant that our largest plan is the base plan in Switzerland, which is essentially a mandatory defined-benefit plan. So there's a limit to how much we can do on the plan design, given our largest plan is effectively defined-benefit open to new rule.

On the funding policy, I'd say it's been pretty intrinsically linked to our derisking exercises. So apart from local regulatory requirements, additional funding has really been considered around different M&A activities, but also in order to facilitate derisking activities when they do arise. On the investment strategy, we perform ALM every three years for our big plans to refine the strategic asset allocation.

In the US and the UK, we've put so-called journey plans to increase the hedges that we have on the various financial metrics. And we hedge interest rates and inflation in those markets. Particularly in the UK, we have a bespoke LDI mandate that we use in order to achieve those hedges. And that was one-- yeah, we have pretty sufficient headroom in collateral for times of crises, which we experienced last year and the gilt markets towards the end of 2022, whereas we found the less bespoke pooled mandates to not be as satisfactory for some of our smaller plans.

On the member exercises, we performed some typical exercises you see, for example, in the US, offering lump sums to former employees. And in general, we find providing choice to employees to be generally palatable. And for our HR colleagues, that's also seen as a positive choice to give either current employees or past members. Other successful activities somewhat in this space have been a review of discretionary practices, so, for example, in the UK choosing inflation metrics, use of pension increases and changing them where permissible and where it makes sense to do so.

On the transfer to third parties, our biggest settlement activity was in 2020, where we fully settled our Finnish and our Swedish pension plans. We moved all the pension liability for current and former employees to an insurance company and then dissolved their ABB pension foundations. And additionally, that year, we performed an annuity purchase in the US for retirees.

We've done some smaller exercises in other pension markets. So we have people in Canada, Netherlands, and South Africa the last couple of years. And so through these activities, through the divestment we had in 2020 as well, we've seen our pension exposure shrink by almost half over that period in the past four years. And we continue to look at opportunistic strategies as they arise.

CHRISTOPHER MAYO: Sorry, David. You're on mute.

DAVID FINN: Thanks, Chris. Thank you, Lee. You described how corporate activities, so buying and selling of different parts of the business, has had an influence on the actions you've taken. If we stand back from that and consider just the scale of pension plans between large and small, does that have an influence on your decision-making?

LEROY HOUSE: Yeah, certainly, and in 2021, we divested 30% of our business. We were looking to effectively rightsize our pension footprint. So one of the mandates we had was, OK, we're doing this transaction as a company. Therefore, look at ways to reduce the overall exposure that we have around the world. We had both the biggest plans and then also the tail of smaller plans that just add general complexity to a business to run.

DAVID FINN: Thanks very much, Lee. Clare, I'll turn now to you and ask the same question. Where are you in terms of the activity you observe happening in pension activity you were involved with through the five categories-- design, cash, asset management, and liability transfer?

CLARE SMITH: So yes, so similar to Lee, we've been through the traditional route of closing to new entrants, closing defined-benefits future accrual. I think, in my experience, if you're switching from defined benefit to defined contribution for your current workforce, you can't really cheat them out of a fair and reasonable exchange. So in my experience, the cash allowance approach has always worked quite well to make people feel they're kept whole in some capacity between DC and DB. And that's also helpful for M&A when you're integrating.

I suppose, then, there's a sort of general education amongst the workforce in terms of making sure they understand what their benefits entitlements are. So education has really been very important. And that's sort of facilitated, if you like, the liability management exercises that have been implemented over history, giving people flexibility and options.

And then more on the asset side, ALM studies will have been very helpful in assisting at the right timing for identifying derisking opportunities, diversifying the asset allocation, and then the market opportunities to look to sell off some of the liabilities, really either wholesale or piecemeal.

And there's lots that can be done around that. And we've certainly done selling off things, like transitioning pensioners to separate vehicles with insurance companies or pseudo insurance companies, small retiree benefit pensioner exercises, selling those to insurers in the US, for example, and looking to do buy-ins in the UK.

So different sort of solutions in different countries under different legislative regimes, but there's plenty of opportunities out there. So in my experience, chipping away at the edges a bit lightly, really doing bits and pieces as you can when you can, supporting the workforce with making sensible decisions, and if it's right for them to leave the plan, then so be it. But education is very important. And I think that's covered. Yeah.

DAVID FINN: Thank you, Clare. And just similar to the question that we posed to Lee, has there been a delineation between your larger and smaller plans in terms of where you focus your efforts? Or is it a global effort?

CLARE SMITH: It's a global effort, but, yeah, I think, generally, the focus is on the biggest plans simply because of some of the balance sheet risk, if you like. So that tends to be the place to focus also. They generally have better buying power, if you like, with external insurers and to transfer risk from the company out to third-party providers.

But, yes, focus is the largest, but definitely arms around everything to see what opportunities there are. I'm generally trying to have a consistent approach to how you treat your workforce across the globe.

DAVID FINN: Thank you, Clare. And, Raymond, I'll hand onto you now for the same question in terms of Ford's progress to date on design, cash, assets, and liability transfers.

RAYMOND YERKES: Yeah, I would have to say that we are probably in the same boat as Clare and Lee. We are quite far down the journey of our derisking strategy and what we like to say in our financial statements, that our funded plans are fully funded and at asset target allocations.

As we take a look at plan design, similar to Lee and Clare, we've closed plans to new entrants to stop the growth of liability. We've also taken a look at other areas, such as maybe putting a cap, like a cap on service. And that has worked out well for us, hit a large curtailment gain a few years ago. That was back in the States.

In terms of cash funding, our policy is we only fund to the regulatory requirements. If there is additional cash available, we'll fund to a discretionary feel that there is a risk, let's say, to the fund status of any particular plan. Our asset derisking-- we've started this journey quite a few years ago, back in at least over a decade with our glide paths and moving more and more to fixed-income securities and less to risk-seeking assets, so the fund status improved.

And, in addition, we hedge. We hedge for interest rate risk and also for inflation, were plans that provide indexation. That's primarily in the UK. And transferring to members, our plans to allow for the members to take lump sums upon retirement. And we've also taking advantage of lump sum windows for term vested within the States, and that's helped quite a bit in reducing not only membership but also the liability itself.

And then that takes us to transfer to third parties. We had our first complete buyout of a plan in the Netherlands back in 2020. We've had a partial buyout in one of our non-US countries last year. And this was consistent primarily with just the pensioners. And so we still have the remaining members of the plans are the actives and the term vested.

So not much new to add there, I think very similar to what Clare and Lee. And with respects to where we focus, our goal is to fully fund all plans throughout the globe. But our key focus is on the major markets in the US, Canada, Germany, and UK, because those sales have the greatest impact to our corporate cash and our financial statements.

DAVID FINN: OK, and so that was the answer to my corollary question. So you put the people time and effort into where you can have most financial impact.

RAYMOND YERKES: Correct, yes.

DAVID FINN: OK. So interesting to hear from the three of you that you've been part of an observed activity across the spectrum of different risk-management activities. It's not any single focus, and maybe the emphasis point is different. But all three organizations have been involved with across the five.

So on that theme, Raymond, if I continue with you, when you look at the activity done to date and the future, what's been the major driver in activity? Now, the title is termed "Risk Management," so that has a hint about financial. Are there other things which come into your planning and decision-making beyond the dollar or financial?

RAYMOND YERKES: Beyond that, I have to say the main focus is that it is the right utilization and stewardship of corporate cash. Our goal is to ensure sufficient funds to meet benefit payments and members, so the plan upon retirement, an appropriate investment strategy to minimize the funded status volatility. And by minimizing that risk, you minimize the risk of cash contributions in the plans, especially, with a severe or even adverse economic downturns, right? The last thing we want is for the plans to require funding and steep PBGC premiums when the company is strapped for cash.

As we go forward, and we're pursuing these buy-in and buyout transactions with insurer primarily for pensioners and pay, we are looking not only with respect to proper utilization of cash but also where we can find it like a win-win-win situation. And as a result of our plans being well funded and what we see as increased competition capacity and annuity market, we are finding share premiums in certain markets to be less than the regulatory contribution requirements or the planned surplus.

So basically, we are looking for transactions that can be done with no corporate cash. And when we find these scenarios, we also want to make sure-- and most importantly, we want to make sure that the members of the plan are not disadvantaged by the transactions. Membership is well protected, if not better protected, post pension transfer to insure.

And so in markets where we find these type of situations, and we find these win-win-wins-- and the reason I call it more of a win-win-win is pensioners, or those that are impacted by the transactions-- their payments are secured with an insurer that's in a highly regulated industry.

Strong capital adequacy ratios is another aspect, another quality we look for, as well as strong credit ratings. And when the premiums are less than the funding requirements or the surplus you have, the remaining members under status improves because now you release this kind of trapped surplus, and thereby improving security of their future annuity payments.

And finally, the corporate sponsor wins since once you have improved upon the status, if you do partial buyout, this can result in a contribution holiday or extend a contribution holiday if already there's no need to contribute any cash to a particular plan.

So as we take a look at this, the key thing is economic related. It's all around the corporate cash but not disadvantaging the members of the plan, making sure that you put the members in a plan in this very-- the same situation, or if not better situation post a transaction.

There is a little bit the fact that as we have closed these plans and they are shrinking, and this is not-- we're in the automotive industry, of course. It's not a core competency. And to try to move this type of work off our books, and the more we can, it frees up additional resources, I would say, within the company to work in other areas. So, I mean, that's kind of a side benefit.

But that's just the way the future-- DB plans are pretty much going away, and the focus is on DC. So we do our best in terms of managing the plans and secure the benefits for the members as well.

DAVID FINN: So it's interesting to hear you describe looking for value in the market or appropriate pricing, appropriate use of cash, in parallel with member security. But the win-win-win situation, of course, is fantastic if it happens but won't always occur. Have you ever found that you've worked on transactions or activities that just found that cost was a barrier-- it was too expensive do something that needed to be parked?

RAYMOND YERKES: Well, yes, if we feel the premium that is required to pay for a annuity transaction is above our threshold, then we won't pursue it. A key directive to some extent is to do no-cost-type transactions. If not, if it costs us to do money, then we might as well just manage the plans internally.

DAVID FINN: So there's a strong sense of where value is for the company.

RAYMOND YERKES: Correct, yes.

DAVID FINN: Actually, that's it's interesting. Lee, I'll look back to you now on ABB again. What's been the driving factor for past activity and future plans? And you have already described corporate and M&A activity. Are there other factors which have come into decision-making?

LEROY HOUSE: Yeah, I think for us, it's actually been quite changing and evolving over the years. So as I mentioned before, management teams change, or the priorities of management change, or there's the economic situation in the world changes. So in 2020, when we had the divestment of about 30% of our business, we agree to remit of, OK, reduce gross pension exposure.

And less of a priority is any nonoperational P&L impact from the settlement charge. Now, that same P&L impact used to be actually quite a big concern pre-2020, which stopped a lot of activity for us prior to that date. And it's a bit of a term deterrent today as well. But in 2020, we kind of had a sweet spot where it was not a priority, such that taking large settlement charges was OK.

On the cash side, at times, asking for cash to do derisking project has been problematic or difficult. And we get shot down just because there's a cash element to it. And other times, if the company cash situation is quite good, then sometimes no problem at all. We just get a green light for a particular project, even if there is a cash requirement.

So in short, we sort of have a process that's just develop and periodically refine a list of derisking projects we think make sense, that fit our strategy. And if there's economic financial viability to do so, the timing is right for ABB, then we proceed to management, too, for decision to execute.

I think similar to what Raymond mentioned on the overall company strategy, we find approvals have gone much better when we can align the rationale to broader company goals. So if management says, we're reducing corporate headcount or reducing country management resources, as well as expecting, let's say, an increase in M&A activity, if we can position asset derisking projects as, in the future, we won't need to have as many resources running these plans--

Also, future M&A projects will be easier because we just don't have a pension plan that we have to now deal with as a potential barrier to that project or that M&A deal-- those things actually give us pretty good tailwinds to getting approvals for projects that might not be super slam dunks on the economic financial side.

CLARE SMITH: So what I'm hearing is that the prioritization and levels of tolerance vary depending what else has happened in the organization, and also the focus on what cost means-- cost can be a priority of cash, or it could be a priority of P&L. And again, it depends on other factors.

LEROY HOUSE: Yep. Yep, exactly.

DAVID FINN: Thank you. And then finally to you, Clare, on this question. In your observation, what's driven your past and future plans for derisking activity?

CHRISTOPHER MAYO: Clare, you're on mute, sorry.

CLARE SMITH: Thank you. Apologies. So a main board mandate is, in my experience, very helpful to driving this sort of direction on reducing the balance sheet volatility containing the costs for benefit provision, reducing the cost of running the plans, managing the plans, and also in terms of projecting what the cash flow is going to look like with no surprises. So with that backdrop, it's quite helpful to the platform to implement the derisking strategy because it ticks all the boxes that the main board is looking to achieve.

DAVID FINN: Does cost always come into it? And does it vary in terms of how important it is?

CLARE SMITH: Well, yes, it is. It's part of our, if you like, the approach to implementing the strategy. And I think it's a sort of playoff, really, when you present your-- to come back to it, but when you present the business case for a derisking project is how much is it going to cost to deliver.

But, yes, I think in terms of we're not looking to cut costs of the workforce benefits, I think that's when it starts to get quite sensitive, really, around trying to take things away from people. And that was the point I was making about cost containment of benefit provision, the cost reduction in terms of efficiency of delivery.

DAVID FINN: Thank you for that. And, Clare, for the third question, I'll stick with you on this one. And this is not looking at the-- with any pension change project, there are lots of stakeholders to consider, multiple parties, all of whom have their own advisors, so lots of different interests to manage and to balance.

So with reflecting on the different projects you've gone through, as you think about internally finance or cash and accounting colleagues, HR colleagues, [INAUDIBLE], fiduciaries and trustees, regulators, providers-- and also I note you've been very strong in emphasizing member and employee education throughout this. So that's possibly the key stakeholder in a pension because, ultimately, they're the beneficiaries. What has your experience been in securing the different agreements from these parties, all of whom will have a varying perspective?

CLARE SMITH: Well, as I alluded to, it's helpful if you have a board mandate, because you have something to sort of hang your project on, if you like. But preparing a business case, which is comprehensive in looking at all of the moving parts of a derisking project is essential in my mind and in my experience.

So understanding your financial year and making sure that your project is aligned with reporting dates and budgeting cycles and making sure that you've identified any costs-- they've been through budget approval process, cash, when that's likely to fall due, and that's part of a cash budgeting cycle within the wider organization. And then once you have your master business case approved is looking at the delivery of that, and that's all-- it's very important. It's around timing, and it's about delivering when you say you're going to deliver.

And if there are too many components that are unknown, it is quite helpful in my experience to break it down into sort of bite-sized pieces that are quick wins, if you like, so that you can achieve small components of the master project within a company financial year. And that success and achievement, if you like, sort of fuels everybody's enthusiasm to carry on with the next phase, if you like.

And then the other important angle of this, which is with the workforce, is the communication and preparing the workforce and participants who are no longer with the organization as well. You have to reach out to all of the legacy groups, retirees, and your terminated vested co-workers, and make sure that they are all well informed.

And that, in part, can sort of cause some, I suppose, concern or negativity if you're making changes to somebody's income. You need to make sure that you've managed that in terms of very, very good communication that's robust and addresses all of the questions that people potentially could be concerned about. Yes, I think I've covered most of the points.

DAVID FINN: You describe a very structured approach to approval. You also mentioned delivering when you say you'll deliver and also within financial reporting periods. When you think about these projects, do you have a timeline in mind if-- and recognize that there's a variety of different things, but is there a median or a typical timeline for a pension change or pension derisking project?

CLARE SMITH: I think it varies from organization to organization in my experience. The one I'm [INAUDIBLE] currently, it's very much driven by a financial year. It's just the nature of the organization is making sure that what is achieved within one financial year, which is why I suggested that sometimes it's helpful to break a larger project down into smaller pieces or align with other projects that might be going on in the same country to try to get some sort of synergies of consultancy costs, for example, across the piece.

And you're dealing with plan fiduciaries as well in some countries and trying to-- just interesting to try and make sure that these don't become very, very protracted and overly costly discussion exercises, if you like. It's more about presenting the business case, getting engagement, and delivering.

DAVID FINN: Interesting. Thank you, Clare. And finally, Raymond-- sorry, Lee, Raymond next to you-- so again, stakeholder management in your experience, both internally and externally with getting agreement to pension change projects.

RAYMOND YERKES: Yeah, so I like to stand under what Clare had mentioned. We started socializing, like bio transactions, back in 2018, and just help educating our leadership team know exactly what does that mean. What does that mean with respects to the members of the plan?

What does that mean with respects to cash? What could that potentially mean to the accounting treatment, especially with settlement expense? And just to get everyone comfortable and educated, and it's nothing they deal with on a daily basis, I would say. They're more in tune with the operating, what's going on in the operating world. So I believe that a lot of that socialization of the concept and idea of back in 2018 helped with respects to getting our Netherlands bio transaction approved back in 2020.

And then also laying the groundwork with getting our transaction with $700 million bio transaction of pensioners we had in one of our non-US countries last year. And the timing to do this-- it's what the non-US board-- they ask a lot of very good questions. You can lay out the business case, cash required, how it improves the fund status for the remaining actives and for members.

But they also-- on those boards, they have HR representatives and ask certain questions about, OK, what is the impact on the members? How do we communicate this to the members? Is anyone going to be advantaged or disadvantaged? How do we make sure that it's going to be a seamless transaction, that everyone understands what this transaction entails, and what's the impact? And so it's just not all numbers, right? It's a lot of focus on the beneficiaries within those plans and to make sure that everyone's squared away.

I think one of the other hurdles is, especially in non-US clients, such as Canada or UK, our external financial reporting is US GAAP. And so there's two different measures of liability. You have Canada and UK are primarily government-related securities plus 25, 50 bips. But if you're measuring that liability in US GAAP, it's corporate double A.

So you may be in a surplus from a funding valuation from an economic standpoint in those countries, but if you do the transactions from a US GAAP, it may look like you had this large settlement expense. But it's educating that settlement expense doesn't always equate to cash, right-- it's just an accounting treatment-- and getting them comfortable with the fact that, all right, it actually improves the economic situation for the company, but it may not look like that with the financial reporting.

So with that, I think a lot of the work is done upfront and then monitored through the actual process of doing a buyout, which could be within three or four months-- depends on the size. If you have a significantly large transaction, if you have a lot of interaction with the particular country because they want to have-- making sure that we get their terms and conditions within the contracts that they want to make sure that the review of the buying contracts or the buyout contracts. So that can take a while, and it depends how many insurers we have. But for a large transaction, it could take anywhere at least six to nine months.

DAVID FINN: Thank you. OK. That's interesting. And, Lee, same question to you in terms of stakeholder management, internal and external, for your change projects.

LEROY HOUSE: Yeah, so I'd probably echo a lot of what Clare and Raymond just said as well. I think what's helped us in the past and hopefully in the future as well is we have a very clear pension strategy that's been communicated to the management of our company, as well as all the way up to the board of directors of the company as well.

So as we bring projects through to management, this is why it aligns to our strategy. Here is also why it aligns to just the overall company direction. And that usually helps defend why we bring ideas forward. And whether it's the timing is right or not-- yeah, that's a bit out of our control, but that allows us to continually bring ideas and sometimes the same ideas back that we brought maybe several years ago. But maybe the circumstances have changed.

For example, maybe closing a plan was considered a bit not the right time because there was a large company restructuring. But then maybe several years have passed, and, yeah, for that particular country, now might be an OK time to then move from DB to DC, or just market pricing has gotten better for a buyout. So then that type of project is then more palatable.

But yeah, it's just sort of comes and goes. And we kind of just bring ideas as much as we can and then make sure it's clear and communicate clearly what they are. There's a lot of terminology around in different markets of the same thing. So we try not to get too bogged down in bulk lump sums or retirement transfer options or buy-ins, buyouts, annuity purchases. Those terms don't necessarily mean anything to the company's CFO. So we try to make those a bit more generic and communicate what's actually being-- what's happening to the pension plan because of a particular project.

DAVID FINN: Thank you, Lee. So what I've heard from the three panelists is quite a thoughtful, governance-strong, I would say no-stone-unturned kind of approach to decision-making, and so quite a methodical way of doing things.

But with that in mind, the final question for the group is, given the projects you've gone through and the processes that you've adhered to, what lessons have you learned that you deploy in a future exercise? Because there's always something you can do better in any given project. What do you take away from your experience today? I'll ask you first of all, Lee.

LEROY HOUSE: I think for us, I think one thing is we dig a little deeper, so find it useful to get multiple opinions on particular projects and better to err on the side of asking too many questions. This could be through consultants or internal pension managers or other local experts or regulatory people. Face-to-face meetings, when possible, have been helpful in uncovering stuff that might not have come across in virtual meetings.

And also keep in mind that the pension derisking projects-- not all the people involved are going to have the same interests as you. So when we look at a planned termination for the pension manager of that country, that's his or her job lost. So we need to work with that person to execute such a project. But maybe we need to be a bit more careful and delicate with how that interaction goes because we're quite relying on them to execute their project, but it's probably not their own personal interest to do so.

And also maybe even to your first question from-- first question before was allocate some time of smaller plans. The largest risks certainly lie with largest plans. I think that's true across the board. But I think we've been able to have a lot of quick wins through spending a bit of time on smaller plans, for example, looking at a derisking project in the Netherlands. We have some plans that have insurance, insured contracts.

And spending a few hours with a consultant on that, we were able to conclude actually there are no financial risks left for the employer, so we can just wipe this plan out with the settlement, whereas just previously, the local business, the local actuary, were just doing evaluations every year and reporting the information. But challenging the status quo here is the easiest settlement plan termination that we could have.

And then also in Finland, whenever we did our large buyout of the Finnish plan, we also looked at the smaller Finnish plan that was about maybe $2 million of plan assets, so way below any materiality threshold that we look at. However, just taking a little bit into that, we realized the asset that [INAUDIBLE] held had a book value of Finnish apartments and had to be revalued for decades.

So it wasn't a $2 million asset. It was actually more like $20 million. And so that money could come back to the company. But you don't know that because it's such a small thing you never would pay attention, but maybe there's actually some good and bad surprises hidden in those smaller jurisdictions.

DAVID FINN: Take time to look at the detail to find opportunities.

LEROY HOUSE: Yeah.

DAVID FINN: Clare, same question to you in terms of lessons learned from projects that you take forward.

CLARE SMITH: Yeah, it's been a long career, lots of lessons learned. So I think don't get disheartened if you see an opportunity and, for some reason, it's not the right opportunity for the organization. Just keep planning, keep reviewing, keep looking for opportunities. There's always something that will help speed up the process as and when it is the right opportunity, for example, making sure that the plan participant data is fit for purpose, it's clean, it's ready to go.

That you haven't got other projects that you need to attend to-- get on with those. Get those done. Keep looking at the year-end financials and looking at where, I suppose, the biggest wins might be and prioritize projects so that you're focusing on what's going to be of interest to people who have responsibility for signing off on the project.

And then when you're implementing, you're working with cross-functional teams across many countries. Keep them engaged. Keep them motivated throughout your implementation projects, because they're key to making a successful delivery, if you like. So, yeah, be prepared, and then don't be disheartened, and just keep focusing.

DAVID FINN: Thank you, Clare. And then finally, Raymond, what's your perspective on lessons learned and things that you might do differently or bring into future project activity? Raymond, I wonder if you're on mute.

SPEAKER: Yeah. Raymond, I think you're muted.

RAYMOND YERKES: Apologies. Yes, I was. I guess one of the biggest lessons I learned is I wish I had a chance to talk with Clare and Lee before we did our largest bio transaction last year, because do not underestimate the time resources required to complete a pension risk transfer. Even after approval, the amount of work that you have to work with the plan administrator and survivor audit, HR regarding communication strategy--

If you are negotiating your own NDAs, if you are negotiating your buyout contracts, there's a lot of terms and conditions that Ford would like to see in the contract. And so there's a lot of back and forth with legal on that, a lot of meetings that need to occur. And if you have more than one insurer, that just doubles or triplicates the amount of work.

So I guess the key thing is if you are doing a transaction, if you are starting-- if you haven't done one that's a very large transaction, don't underestimate the resources. It's probably you can get a dedicated person from HR, from plan administration, from legal, finance, and so to work the projects through. Everything turned out well. We had that win-win-win situation, but it was kind of like a second job that you're working outside your normal responsibilities.

DAVID FINN: Thanks very much. And thank you again to you, Raymond, to Lee, and to Clare for those really interesting insights. And we've heard things about careful communication to all stakeholders, good education for members in particular, a tenacious approach, good governance and investigation on all the different financial and nonfinancial aspects of transactions to make sure that they're the right fit, and being opportunistic, that sometimes there are opportunities in finance and other opportunities to do things that aren't immediately apparent.

And now I'm going to look to Nathan. Nathan, given all of what we've heard from Clare, Lee, and Raymond, what are you seeing in the world in terms of pension risk management across the companies we work with? And if we start with what we're seeing in assets.

NATHAN PAVLIK: Thanks, David. And start just by looking at what the assets tell us about a long-standing trend that we know is going on in that DB-to-DC transition. And all three panelists have seen this as well, and that's we very clearly are on a move from DB to DC. It's accelerating. We've seen that over the past several years, and more legislation is driving further growth towards DC.

On the next slide, we see a little bit more in terms of how pension asset managers have taken their strategy over the years. And in the left, we see global allocation across key markets. And I have a few things to highlight-- I mean, the equity exposure has gone down over time and definitely taking some risk off the table, but that's not all moving to fixed income. And we see significant increase in that allocation to other investments, which includes things like real estate derivatives, and even buy-ins.

And so a key theme here is diversification, not only by the broad classes that we're seeing here, but even within classes. And I think we heard from all three panelists that they've been doing ALMs, so reevaluating, in light of a very different market environment today, do we still have the right mix for our plans?

And another trend that we've seen then is increase in delegated investments, whether it's called delegated OCIO, but shifting responsibility to a third party to be able to act more quickly, have access to different managers and better cost profiles, and it's something that we're seeing.

DAVID FINN: Nathan--

NATHAN PAVLIK: Over on the right--

DAVID FINN: Go ahead.

NATHAN PAVLIK: You can go ahead, David. I was going to say, over on the right, we do see a split by country, and we've highlighted that markets do vary for a variety of reasons.

DAVID FINN: You mentioned that the growth of the others, that catchall category outside of rev, of equities, bonds, and cash, and that that includes a growing component of buying annuities. Given the volatility in markets that Chris described at the outset and the economy in general, what's that done to volumes and of annuity transactions globally?

NATHAN PAVLIK: Yeah. So on the next slide, we see for two markets, US and UK, volumes are at or exceeding all-time highs, so definitely still a very active market. We see new insurers coming in, so definitely a lot of activity, not just in these two key markets, but elsewhere.

And pricing-wise-- and we track that as well on the next slide-- we see across different countries and price relative to an accounting style liability. So this is important for evaluating PBO-type or P&L impact. We've heard from the panelists that they have perhaps different measures in evaluating whether something is economically favorable for their organization. But overall, I will say that pricing is quite good historically across these countries. Those that are developing, Germany-- you see we have some wide ranges but established markets and very competitive markets.

DAVID FINN: And outside of how assets are deployed either to traditional classes or in an annuity purchases, are we seeing organizations do other things on liability management exercises?

NATHAN PAVLIK: So on the next slide, we have a really quick snapshot of some other new developments. And these really go across the five categories that we've been talking about today. And we've heard that having a clear central strategy and that lens through which to approach new opportunities really allows organizations to act. So those that are prepared are going to be most successful.

And a couple of the items that are out here-- I think Lee mentioned the LDI crisis last September in the UK. And as a result of that, organizations looking at do they have sufficient liquidity. In Ireland, strict governance requirements increasing effort required to manage those plans, coupled with really favorable pricing, leading to more settlement activity and move to master trusts. The Netherlands-- there's been a long, long-standing pension reform, and it's finally here, so companies needing to act.

And Spain-- I think this is really interesting, and it's an action that took place in Spain but can apply to other locations as well. There was not really a strong market for pension buyouts in Spain. But we work with a financial organization there to approach insurers, convince them of the value of the market, and built a market for them to be able to execute a rather significant transaction. And so that was a material plan for that organization, and so it was worth their time to invest.

And then in the US, again, some more lump sum transfer activity, perhaps accelerated by some coming legislation.

DAVID FINN: And, Lee, or-- and Nathan, sorry, just putting you on the spot in the 90 seconds we have left. We did have an advanced question about emergence of defined contribution, where that will be possible in Germany and Switzerland, where historically law and regulation made defined benefit quite sticky. What are we seeing there?

NATHAN PAVLIK: And so Lee had mentioned that there is mandatory plan in Switzerland that is considered defined benefit. But above a certain salary threshold that's defined, you can't offer DC. And so we're seeing an uptick in organizations looking to do that.

And then in Germany, a pure DC plan has been theoretically possible since about 2018, but none had been implemented. All had a guaranteed return of at least zero. Now there's a new plan implemented for the pharma and chemical sectors that is pure DC. And so that may be opening the door for Germany.

So I recognize we're close to time, so I will turn it over to Chris for wrap-up.

CHRISTOPHER MAYO: OK, thank you. Thank you all. So first of all, again, just to repeat, thank you to Clare, to Lee, and to Raymond for participating in the panel and answering our questions, which I'm sure will be useful to all those who've joined today. David and Nathan, thank you for your support. And thank you to all those who have joined today. We really appreciate you joining us and look forward to hosting another call in about six month's time. Thanks very much, everyone.

[AUDIO LOGO]