How can trustees stand their ground in sponsor discussions?

With help from an emerging market of covenant advisers, trustees started requiring security for corporate actions, stronger assumptions in funding negotiations and increased funding contributions.  

For a short period before the financial crisis in 2008, trustees were emboldened and to some extent felt they had a new regulator at their side.

Following the financial crisis, levers were pulled by governments globally to stimulate their respective economies. In the UK, the regulator got a new statutory objective around ensuring employers’ sustainable growth plans were not adversely impacted.  

A new phase of easements and flexibilities were introduced into scheme funding discussions.  

Although arguably nothing had really changed – the scheme funding environment already contained these flexibilities – the narrative appeared to have shifted back towards now emboldened sponsors that to some extent may have felt the regulator’s wings had been clipped.

This shifting of the narrative towards and then away from trustees over the economic cycle has made it difficult for them to: (a) identify when; and (b) understand how to stand their ground in sponsor discussions.  

Even with an issue that trustees feel strongly about – for example, a proposed recovery plan that is considered far too long – it has become increasingly difficult for them, faced with well-advised sponsors arguing that a shorter plan would adversely impact sustainable growth, to stand their ground.

Against this backdrop, just how can trustees in high-profile and challenging situations ‘stand their ground’ on such issues?

Ensure your position is credible

In any negotiation, it is a common misperception that one party is ‘right’ and one party is ‘wrong’.  

In our experience it is not about being right or wrong – there is rarely clarity on that – it is about having a credible position, ideally backed by good information and sound analysis, and sticking to it.

If the trustees’ position lacks credibility then it will be hard to articulate, substantiate and together with colleagues, persuade a sponsor to see your perspective.

Be clear and consistent among the trustee group

We’ve seen over the years, sponsors use their inbuilt structural advantages over trustees – ie companies generally meet more regularly and have implicit escalation routes, from the pensions manager to finance director to chief executive to the wider board and so on.  

Trustees need to structure themselves accordingly and ensure that, as a group, all messages are delivered clearly, in a thoughtful way, and there is total consistency.  

It has been known for trustees to fragment on issues when individuals are approached outside the regular quarterly meeting cycle.  

Returning to the first point, an inconsistent trustee group lacks credibility.

Saying no, when required, can be surprisingly effective

One of the great things about the scheme-specific funding environment is that for things to happen there has to be consensual agreement.

Otherwise you get a ‘failure to agree’ situation and you might go beyond the 15 months the regulator requires for submission of triennial valuation documentation.  

Our experience is the regulator is quite understanding of trustees working together with sponsors to reach the right outcome, even if it takes a little longer.  

So, it is okay to say ‘No’ and to not agree things until, as a trustee group, you feel your issues have been appropriately dealt with.

Again, while taking care to ensure that the trustees’ position remains credible and there is not undue intransigence, saying, ‘No’, and being prepared to take longer to reach a sensible outcome, can be surprisingly effective.

Darren Redmayne is UK chief executive of covenant adviser Lincoln Pensions