Alan Taylor Thinks De-Risking Is Worth the Cost

From aiCIO Magazine's September Issue: Taylor, senior manager in European human relations at car-parts manufacturer DENSO, oversaw a breakthrough deal to secure benefits for members across different pension funds—allowing them to continue to accrue benefits while taking the risk off the corporate balance sheet. 

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“DENSO’s focus was very clear: to secure all risks associated with defined benefit liabilities in the United Kingdom up front through an insurer-based transaction. The company had already secured benefits of another UK scheme on an all-risks basis so they knew it was possible; they also had experience working with the Pension Insurance Corporation and recognized the costs involved. In nobody’s book is this a low-cost option. For an operation the size of DENSO, I wouldn’t say money wasn’t an issue—value for money was hugely important for our shareholders—but the company wasn’t driven to do this at the lowest cost. Protecting the ongoing ability to accrue benefits and entitlement was essential. DENSO’s workforce in the UK—the longest-serving and therefore the most valued for its knowledge and skills—is in these final salary schemes. They were closed to new entrants in 2002, so the only active members were the most senior people (by age and length of service) in the organization. The board in Japan wanted to avoid destabilizing them. It wasn’t about getting rid of defined benefits (DB)—rather that we didn’t want the associated risks on the balance sheet. The project was developed in late 2009/early 2010, 1.5 years after the Lehman Brothers’ collapse and when the car industry had fallen off a cliff. Workforces were being reduced across the industry, including at DENSO. The last thing we wanted to do was say: ‘OK, so we’ve done all these restructurings—changed contracts of employment and reduced our workforce—and now we want to mess about with your pension.’ It was just untenable. DENSO engaged KPMG as corporate adviser and project manager. The trustees met with all shortlisted insurance companies after a competitive tender process. The company was mindful at all times about who should be making decisions, presenting proposals, creating shortlists, and developing strategies so trustees could scrutinize them according to their statutory duties. The project was launched in November 2009 and the final transaction took place on March 2012. However, the final structure to secure the benefits on an ongoing basis for active members wasn’t nailed down much before January. The original assumption was that we couldn’t touch active members so we had already begun preparing for the process. From shortlisting providers to implementation took eight to nine months. It was through joint negotiation and challenging assumptions that the insurers were tasked with finding a solution; it needed a push from the company and trustees saying ‘you have to be fair across the different member groups or it is going to cause us a problem.’ Pension Insurance Corporation’s proposal had to meet the objectives and was subject to a detailed legal review by all the different stakeholders involved; we proactively informed the regulator to ensure it had the opportunity to identify any issues with what we were proposing. We also worked with the HMRC regarding the corporation tax implications of the transaction. In 12 to 18 months the schemes will disappear, but since the transaction all DENSO’s risks have gone. The trustees have the indemnities and protection they want and know they are fully funded and secured. The members have a far greater level of protection for their benefits: an FSA-regulated pension, not a scheme supported by a company—albeit a very strong one—as, many companies have walked away from their final salary obligations and our members know DENSO hasn’t. The complexity would put lots of people off, especially those with multiple schemes and legal entities. For a company, it’s hugely expensive. It’s front-loading your pension cost as opposed to assuming the ability to fund it for the next 50 years, where deficits don’t matter in the short-term. It’s your workforce you’re messing with so you need the best possible advice and you must be prepared to challenge the traditional state of mind regarding DB benefits. There is innovation in the market and people should seek that out.”