Capital backed funding arrangements: a new tool for DB pensions

What are capital backed funding arrangements (CBFA)?

Capital backed funding arrangements (CBFA) can offer tangible benefits in alternative risk transfer, as defined benefit (DB) pension schemes look towards securing member benefits in full. But what exactly are they, and how can their benefits and risks be assessed?

CBFAs can offer tangible benefits for defined benefit pension schemes to secure member benefits in full: reducing downside investment risk, covenant improvement, access to investment expertise, governance arrangements and potentially assistance to prepare for an insurance buyout or a low dependency strategy.

Arrangements offer distinct benefits when compared with DIY approaches, superfunds, DB master trusts and conventional insurance risk transfer policies.
 

What are the risks?

However, there are new risks to consider and this remains a relatively new area with limited standardisation or information in the public domain.  It is important to understand how an arrangement works both in the normal course of events, in periods of stress and if the arrangement is terminated.

In this paper – published by the Institute and Faculty of Actuaries¹ and co-authored by Invesco portfolio manager Derek Steeden – you will find a framework to allow an effective initial comparison, assessment and discussion of these arrangements. We hope it helps pension schemes to identify appropriate next steps.