29 Nov 2018 3 min read

Raising, running and herding zombies

By John Southall

Are zombie pension schemes a viable option? And if so, how should their investment strategy be set? 


Are zombies shuffling inexorably out of the world of popular culture, and into that of defined benefit (DB) pension regulation? As we explained in a recent article, we think there is a chance this will be the case if more pension schemes follow their peers at Kodak, BHS and Trafalgar House, in becoming independent entities, run without sponsor support. Noises from the Department of Work and Pensions (DWP) also suggest that Regulated Apportionment Arrangements (RAAs) – the mechanism which allows a financially troubled employer to detach itself from its DB liabilities (potentially resulting in the birth of a zombie) – could be streamlined, following feedback that the existing process is too complex.

Are zombies so bad?

Sceptics are concerned with the potential 'rise of the zombies'. They are right to promote caution – sponsors certainly should not be able to play the system to offload liabilities. On the other hand, others argue that it shouldn’t be too hard to detach if this is the right thing to do – a cash injection and zombie structure could be better for members than a pension protection fund (PPF) haircut, and a possible loss of employment.

Of course, there is no free lunch and there is a risk that if performance is poor, the scheme zombie winds up in the PPF in the future. For some members at least, they would have been better off if the scheme had wound up to start with. But this doesn’t mean to say that the lowest-risk option is the right one, particularly if members themselves are given a choice.

A key question for trustees is when – should it become an option – does running as a zombie make sense? And how should the investment strategy be set?


To answer these questions we adapted the same process we developed to tackle the investment strategy for DB schemes in the presence of a sponsor. This approach was explained in our Pensions-Go blog. This involves projecting a pension scheme's payments into the future until its final obligation, and calculating the 'proportion of benefits met', or PBM. By repeating this process using thousands of scenarios, trustees can get a better idea of the chance of success and, in the event of failure, the likely extent of it. To adapt this to zombies our changes included:

  • Modelling the special PPF levies for zombie schemes
  • Including the presence of the PPF as a backstop
  • Making adjustments to PBM values to allow for inter-generational unfairness (younger members are exposed to more risk)

The results? Well you’ll have to read our paper, where we also comment on the potential herding (i.e. consolidation) of zombies. However, a brief summary is that, assuming a modest appetite for risk from trustees and members, zombification is only likely to appeal to schemes that are relatively well-funded. We also, rather aptly, find it’s important that they target an appropriate 'sweet-spot' level of return, to keep them shuffling along.

John Southall

Head of Solutions Research

John works on financial modelling, investment strategy development and thought leadership. He also gets involved in bespoke strategy work. John used to work as a pensions consultant before joining LGIM in 2011. He has a PhD in dynamical systems and is a qualified actuary.

John Southall