Concerns over long-term objectives, managing funding constraints and keeping up with change rank at the top of concerns held at defined benefit schemes, followed by the task of balancing stakeholder interests, new research has found.
There are about 5,886 DB schemes in the UK. Of the 5,794 in the Pension Protection Fund's universe, nearly 70 per cent were in deficit as at October this year.
Schemes also identified balancing the interests of stakeholders, and the threat of uncertainty, as key challenges to the DB sector, in the report compiled by Aon.
How can you be certain that the employer is good for that money in 30 years’ time?
Richard Butcher, PTL
Gary Cowler, partner and head of integrated pensions clients at Aon, said progress will be made on many of these issues by “trustees, sponsors and their key advisers all working together in a really joined-up and integrated way”.
He added that schemes of all sizes are vulnerable to the challenges laid out in the report. Achieving buy-out remains a key long-term objective for many schemes.
The report said, "making progress has been difficult due to sustained low levels of gilt yields and lower asset return expectations – all this despite record high levels of contributions being paid. This can create a genuine tension between schemes and their sponsors".
Bring different stakeholders together
The paper, based on responses from trustees and pension managers at 190 schemes, underlines the importance of reconciling the interests of different stakeholders. Balancing stakeholder interests across areas such as funding negotiations, investment policy and member communication ranked fourth in the list of scheme concerns. Fifty-seven schemes placed this issue in their top three challenges.
Concerns change over time
Of 110 respondents to a 2016 survey by consultancy Capita, 53.6 per cent said GMP reconciliation was their priority for 2016, 42.7 per cent wanted to focus on improving member education and engagement, and 39.1 per cent were focusing on DB derisking.
Eleanor Daplyn, partner at law firm Sackers, said stakeholders need to be honest about funding support and covenant risks. “Before you do that you can’t really, as a trustee, assess whether your objectives are realistic and achievable,” she said.
Daplyn identified the impact of change and regulatory burden as a key source of concern for schemes. Seventy-eight schemes ranked 'keeping up with change' among their three biggest challenges. The issue came third in the report’s findings.
Trustees are worried about the Pensions Regulator’s expectations and “how to keep pace with those, and about understanding what’s expected of them all the time”, she said, including understanding the powers available to them.
“I think there remains uncertainty for schemes on the ground as to exactly how [these are] going to be implemented,” Daplyn added.
Employer covenant is a significant challenge
For Richard Butcher, managing director of professional trustee company PTL and chair of the Pensions and Lifetime Savings Association, “the main challenge is having enough money to pay out the benefits as they fall due”.
He added: “The principal uncertainty in that respect, for most DB schemes, is the employer covenant.”
Funding constraints, and finding a suitable funding level that can be sustained by the sponsor’s level of affordability and covenant, came second in Aon’s findings, with 84 schemes highlighting funding constraints in their top three responses to the report.
Covenant risk is dominating the DB agenda
Defined benefit trustees are becoming increasingly concerned about the strength of their employer covenants, a new survey has revealed, as Brexit uncertainty feeds into broader concerns about the future of sponsors.
Schemes with funding deficits are reliant on the employer covenant, but for those attempting to map out a sustainable funding plan, identifying the long-term financial prospects of sponsoring companies is not easy.
He said employer covenant can be looked at in the context of a one to four-year time frame, but funding deficits mean schemes need to look much further forward. "You could be talking about a 10, 20-year, even 30-year time horizon, and how can you be certain that the employer is good for that money in 30 years’ time?”
Top concerns for trustees can vary, and while progress towards long-term objectives came top this year in the Aon survey, legislation sometimes means trustees focus on the shorter term.
Last year, schemes cited guaranteed minimum pension reconciliation, member communications and derisking as their main concerns in consultancy Capita’s ‘Pension scheme insight report’.
Of 110 respondents to a 2016 survey by consultancy Capita, 53.6 per cent said GMP reconciliation was their priority for 2016, 42.7 per cent wanted to focus on improving member education and engagement, and 39.1 per cent were focusing on DB derisking.
