Aviva: Heads out of the Sand - Nick Johnson
If finance directors are to manage their company's defined benefit pension schemes, they need to take an active role in finding solutions. Nick Johnson of Aviva explains how building a long-term partnership with an insurance company can ease the process.
For a number of years the problem of defined benefit pension liabilities was allowed to go unaddressed. An attitude persisted that as long as the cupboard door remained firmly closed, the bogeyman could not get out and do any harm.
Aviva's head of defined benefit risk Nick Johnson argues that companies knew the danger was lurking but looked the other way. "In the past, there was a head in the sand mentality," he explains, "Everyone was vaguely aware that there was a problem but they weren't being forced to deal with it up front."
As investment returns fell dramatically during the financial crisis, the monster finally escaped, stirring sponsors and trustees to take definitive action. The challenge now is developing strategies to tackle a problem of this size. While each fund has its quirks, Johnson believes that in many cases the route to a solution is relatively simple.
"Companies can stop accruing new liabilities by closing to new members and switch to defined contribution provision," he says. "Then it's a case of starting to manage risk. The route map is quite simple; it's moving along it that's difficult."
Johnson talks in terms of maps and processes but he is excited about work being done by accountancy firms that helps finance directors conceive of their pension fund as a capital project. Once a defined benefit scheme has been closed to new members it no longer looms as an ever growing problem; it solidifies and takes on fixed dimensions.
"For a core business decision such as laying out for new machinery, finance directors look at cost of capital or return on capital," he says. "Traditionally, pensions haven't gone through that process, they've just been a big scary number. Considering them as a standard business problem is quite refreshing."
The critical point is that finance directors have to take control of pensions but once they do that, Johnson is confident the challenges can be overcome. While advisers are trustees and sponsors' primary guide, Aviva works to build a partnership by proposing solutions to each constituent issue of the overall pension problem.
"As a provider we can either just sit there and wait for advisers to come to us and quote them a price on a product or we can tie them together in a much cleverer way," Johnson explains. "By looking at this as a joined up proposition, we get value at each of those stages and our pricing of individual products within that framework can be much smarter and tighter."
"Similarly, a lot of advisers talk about 'sweet spotting' the market – picking a time to transact when they'll get the best bang for their buck. Because we know how the pricing works, we're in a much better position to help them do that."
While price is important, a growing factor in the minds of trustees is financial security. Stabilising the fund itself could be a ten-year-long process, with pensions being paid out for a number of decades after that. If a scheme is eventually bought out, the insurer will assume responsibility for administering it.
"If we were doing a beauty parade before September 2008, two or three minutes would be spent talking about our financial strength – it was just a tick in a box," Johnson says. "Now we probably spend half the time either talking about it or being questioned about it. The belief that we're going to be around in 60 years to pay those pensions is understandably a key consideration for trustees."
Aviva draws on its established brand and broad base as an insurer to inspire confidence. Yet as a newer entrant into this market, Johnson believes the company has certain advantages. Rather than sticking to a defined set of approaches, he is looking to adapt to conditions as they emerge.
"In our four years in this market, we've developed our thinking, systems and processes in the current competitive environment rather than sticking to some ideas that we assume to work," he explains. "We've got ambitions to be a reasonable sized player. The only way to achieve that is by doing deals and keeping up with the rest of the market."
Aviva's recognition that pensions are a significant challenge for many businesses is combined with an eagerness to actively seek out solutions. Trustees, sponsors and their advisers must still take responsibility for funds but companies like Aviva offer a more secure route to solving what once seemed like an insurmountable problem.