Trustees are burdened with the need to constantly lobby the sponsor to cover funding shortfalls in the Defined Benefits (DB)schemes.
Trustees should consider closing the DB Book by selling it to insurance underwriters who take over the annuity liability and deal directly with the DB scheme members.
Consider these three steps to the sale; First a valuation would be done by the scheme actuary as stipulated by the law. These valuations must be filed with RBA by the end of March of each year.
Secondly the trustees should check if there is a disparity between the actuarial valuation and the market valuation. Actuarial valuations are generally projected at 10%. If the market valuation is higher, then the sponsor can retain the surplus from the sale of the DB book. This would earn the BoT brownie points.
The third step would be to engage a proficient financial advisor to secure and evaluate bids for the DB book sale.
The downside of maintaining the status quo is that deficits will continue to accrue as a result of volatility in the market. The members continue to incur administration costs like the mandatory valuations.
Trustees by way of fiduciary responsibility owed to the members could face potential litigation in the event annuities are delayed or go unpaid. This responsibility is held long after trustees vacate their office and is a peril even to their estate.
The upside of selling the book is that it will cut dependence on the sponsor to cover shortfalls in this season of surging market volatility. The responsibility for prudence in meeting member obligations is transferred to the insurance underwriter buying the DB book.
Kephis,Maseno University, Commission for University Education, KCB Bank and Vivo Energy (Shell) have successfully sold their DB books. Giving the trustees and sponsor a sigh of relief.
There are immense benefits of closing the DB books; the most important of all being the chance of staving off the cycle of deficit funding.
Trustees should engage a retirement benefits risk and investment consultant who is independent of the current scheme service providers to avoid conflict of interest