"Nobody gets fired for buying IBM"

“Nobody gets fired for buying IBM” Whilst this corporate saying (or one of its many variants) has been around for some 50 years now, I was recently presented with this in a business context for the first time.

Back in the 70s and 80s, the premise was that choosing IBM products and services was a safe choice for companies. The company had a long history of providing reliable solutions, and that if something went wrong, the blame would fall on IBM, not on the decision maker. Or to put it another way, choosing a less established route could leave the decision maker open to criticism if it fails – even if it was expected to deliver better results.

The saying reflects a safety first and follow the herd mindset. Ultimately, this leads to different professional hazards for businesses and individual decision makers and can lead to sub-optimal outcomes and decisions.

But the landscape appears to be changing. Companies and decision makers are embracing innovation and new solutions as a way to improve outcomes, deliver growth, and extend the potential of existing resources. This is especially true in our world of pensions.

So back to my original situation.

The discussion was the current pensions hot topic: DB pension endgames. Should schemes buy out with an insurer (tried and tested, the established endgame for many – in other words, the safe “IBM” option)? Or should they run on with a view to generating surplus and value to share between all the pensions stakeholders (the less established and perceived riskier option).

This new innovative option does retain more risk in terms of potential sponsor support requirements compared to buying out. However:

• For sponsors it could potentially free-up much needed cash to the sponsor to invest in its business and improve DC pensions for current employees.
• For scheme members, it could potentially lead to improved pensions in retirement.
• For trustees, it enables them to retain existing administrative practices, as well as preserving flexibility for member option exercises and providing IFA support, which may not be available in all cases under a buy-out route (although insurers are evolving their offerings here too).

A key question is therefore what level of risk is worth taking to facilitate these potential improvements in outcomes?

Schemes need to be well managed and reduce risks where appropriate – this does not mean schemes must buy out. In my view it means that trustees and sponsors should be considering the full range of options available and taking an active and informed decision about which is the most appropriate for their circumstances, given their fiduciary duties, requirements of rules, sponsor covenant, and respective views of the trustee and sponsor. This approach is also supported by the Pensions Regulator’s latest Annual Funding Statement.

There is now a tangible prize available, and there is a new and significant regret risk given potential future improvements and the increased availability of endgame options. Some will buy out, and this will continue to be the right solution in many circumstances. In others it will now not be the most appropriate route, and by taking a longer-term view (perhaps with enhanced protections against possible downside scenarios), schemes could target growth and aim to generate value, potentially improving outcomes for all.

Going forwards, schemes should therefore no longer automatically see buy out as the endgame. We are working with trustees and sponsors to consider and embrace the wide range of options and ensure that their chosen destination, as well as the timing to get there, best meets the needs and objectives of various stakeholders.

This includes putting in place appropriate contingency plans should circumstances change. In my view, it is no longer appropriate to simply take the safety first tried and tested “IBM” option. Not least how would the decision look if the herd changes direction?