How trustees can tackle those 3am woes

These ‘3am issues’ may be unlikely to arise in practice, but if they did the consequences could be severe.

However, with the right approach and preparation, the underlying risks can be successfully managed.

The key is to identify the relevant issues for your scheme and be on the front foot in implementing a plan to address them.

Succession planning

Employers are rightly concerned about the lack of suitable candidates to refresh trustee boards and the unplanned loss of key personnel, for example the chair of trustees or pension director.

With defined benefit schemes increasingly seen as legacy arrangements, employers are finding it difficult to identify suitable trustee candidates from their workforce.

Potential conflicts of interest restrict the availability of senior executives, while the increasing duties and responsibilities of the trustee role mean other individuals are reluctant to put themselves forward.

Given the complexity of the issues trustees now face – in particular sophisticated funding agreements, liability-management exercises and capital market solutions – the need for experienced trustees with a broad skillset has never been greater.

To address this, companies are putting more thought into their succession planning by:

• identifying a talent pool of employees with the right skillsets to take on trustee responsibilities, and who can be given time and training to get comfortable with the role;

• developing a key-person risk analysis with appropriate mitigation actions;

• reviewing the pros and cons of appointing a professional independent trustee to their board.

Disaster recovery

There is a growing awareness among schemes that their disaster recovery procedures often lag those of the sponsoring employer, which is a particular issue if services like administration are managed in-house.

This should be a relatively easy fix, especially if the scheme can tap into the sponsor’s resources for the development and management of the corporate’s recovery plan.

However, a word of caution about one of the hopefully very unlikely scenarios that needs managing, namely the sponsor’s insolvency.

Many of the employer’s disaster recovery safeguards will become ineffective in such an event.

Several recent insolvencies have led to the in-house pension team being unable to gain access to the pensions department and its phone lines, because their office is in a sponsor-owned property and the insolvency administrator has denied access.

The disaster recovery plan needs to be robust enough to manage this kind of contingency, as well as other such events. Using third-party providers for IT systems and administration would obviously help.

Role of ‘trusted advisers’

In an increasingly competitive market, consultants are under intense pressure to generate additional revenue from their clients and this creates a real potential for conflict.

How can trustees be confident they are receiving the genuinely best advice, if that advice is to implement a costly solution?

Some trustees address this concern by making it clear their incumbent adviser will not be given the implementation work for any large project, like a buy-in, which they have recommended.

However, this is harsh on the many advisers making valid recommendations and who would, in normal circumstances, be ideally placed to implement such a solution.

Alternative approaches are to commission a second opinion on the recommendations or to put the implementation work out to tender.

While there are some daunting issues facing pension directors and trustee boards, the underlying risks can and should be successfully managed.

This will take time and resources but far less than if one of these issues were to become a reality.

Leonard Bowman is a director at Bath Actuarial Consulting