With a global recession upon us, pension schemes are under yet more pressure. Deficits are soaring and attracting greater scrutiny from shareholders and the Pensions Regulator alike, while companies are desperately seeking means of reducing costs to maintain financial health.
As we head into uncharted waters, the implications of weakened sponsor covenants, overall employee benefit cuts and redundancies, reduced budgets and decreased member contributions are significant – and will have a serious impact on how corporate pension schemes are managed.
Given the multitude of competing priorities and the need to react swiftly at short notice, how should trustees rise to the challenge?
A fuller perspective
Faced with a daunting list of priorities, they must first take a step back and look at the bigger picture.
Is the trustee board structured efficiently and in a way that is flexible enough to nimbly respond to the current environment? Meeting on a quarterly basis may no longer seem appropriate. Can the board – or subcommittees – meet more frequently to address immediate issues or concerns?
Second, boards are likely to face a huge number of competing priorities, particularly where there are both defined benefit and defined contribution (DC) schemes in place. Given the possible reduction in the scheme management budget, what are the absolute must-dos that cannot wait? What is nice to have, but could wait three, six or even 12 months?
Topping the priority list for most trustee boards should be an objective reassessment of the sponsor covenant. Is it still strong? What factors are likely to threaten the financial strength of the sponsor and what alternatives could be put in place? Where are the trigger points for concern and how close are they to being breached?
Beware of conflict
Funding discussions can potentially lead to conflicts of interests, particularly when financial directors are also trustees. It is important the boards are aware of these and have a policy that enables them to demonstrate objectivity in their reviews and decisions. Perhaps now might even be the time to consider the introduction of an independent, professional trustee.
Investment strategies set before the recession must also be reviewed as a priority. If the scheme has a large pensioner population, the potential impact of deflation means existing strategies may no longer be adequate. Trustees need to adopt a more rapid decision-making structure at their quarterly investment subcommittee meetings to capitalise on medium-term investment opportunities.
Member morale
DC members will need to understand the effects of recession on their benefits. A general loss of confidence in corporate pension schemes, coupled with greater financial pressures (such as debt) could reduce the incentive to save. This means member communication will be key, particularly with those nearing retirement.
Existing scheme material may not adequately address these issues and, as a consequence, trustees could see a decline in contribution levels, poor investment decisions and an overall decrease in DC membership, particularly as the government decreases state additional benefits for members earning more than £20,000 a year.
Finally, over the past couple of years, trustees have made significant advances in their own knowledge and understanding.
While not expected to be experts on all subjects, now is the time for them to increase their understanding of the effects of recession on pension schemes. This could come in the form of external training, or via additional support from third parties.
Dafydd Bowen is a consultant in the governance team at Hewitt Associates
