Pensions World

Paul McGlone, Aon Hewitt, has some tips on plotting the investment route your scheme should take

In a jargon filled industry, it is no surprise that new phrases continue to be invented. The “flight plan” is a recent one – so recent, that there is still no consensus around the phrase, with alternatives including “glide path” and “road map”.

At the core of the idea is the principle that a scheme (both trustees and sponsor) should have a funding and investment strategy aimed at taking it to a particular destination. What that means in practice is defining a number of parts of that strategy:

• the long term funding target that the scheme is aiming for and the target date for reaching it
• the contributions that will be paid towards it
• the investment strategy to be followed
• the chances of these resulting in the target being met.

Where are you going?

So where is the difference from a valuation? In some ways it is no different, but the two major variances are usually the nature of the funding target and the robustness of the strategy.

Most valuations start with the question: “How much money do we need today to support our current investment strategy”. Contributions are then put in place to fill the shortfall. A flight plan involves the forward projection of the funding and investment strategy to see whether the actions being taken are likely to take the scheme to a specific long term destination. It also tests how the outcomes might vary from the intended destination, so that plans can be made to manage the risks of deviation and how those can be dealt with. To stretch the flight plan analogy, a compliance only valuation is a bit like checking you have fuel and passengers on the aircraft, but without really knowing where you are flying, what might go wrong and what you would do if it did. You can still fly the plane for a while, but after that… 

On track

Flight plans have their challenges: the first is producing a range of viable flight plans – combinations of factors that work. Usually an ideal flight plan (eg aiming to be buyout funded within five years with existing contributions) simply will not work, so compromises are necessary. That will usually generate many possible flight plans, with different possible targets, contributions, timescales and investment strategies. The challenge is finding the one that has the right balance of factors for your particular scheme.

But it is not just a matter of balancing the inputs to find that optimal plan; it is also about testing the potential outcomes. That means understanding how the strategy would behave in different circumstances to ensure that you are not left too exposed to risks.

Once this is agreed, you can embark on other ideas within a much more robust framework. A monitoring process will help you remain on track. Funding triggers can allow you to identify points at which your strategy can (or should) change. Guidelines for investment objectives can be taken directly from the flight plan and options such as liability management tools can be tested to see if they improve the flight plan.
So a flight plan gives you a proper business plan for a pension scheme – rigorously defined, robustly tested and regularly monitored. Even if you are a long way from your target, we believe that every scheme should have one.