An industry survey has shown understanding risk is the biggest challenge for defined benefit pension scheme trustees, sparking debate over whether trustees need more sophistication, or whether scheme choices need simplifying.
The Hymans Robertson report, entitled 'Inside the mind of a pension fund trustee', surveyed 100 trustees from corporate, non-public sector DB schemes with more than £50m of assets under management.
When asked about the biggest challenge faced as a trustee over the next 12 months, 30 per cent of respondents said it was understanding risk and derisking. This was followed by preparing for the end of contracting out – seen as the biggest challenge by 15 per cent of respondents.
Speaking at an event on Tuesday to launch the report, Hymans Robertson partner Calum Cooper said: “We see a real need for the way trustees perform their role to change... There’s fundamental change in the role of pensions trustees to becoming risk managers.”
Time constraints are often a major challenge for trustees, compounding the difficulty of understanding and mitigating risk in the scheme, delegates heard.
Cooper said: “What we’re really talking about is being strategic in the way that risks are managed, focusing on the big risks to members receiving their benefits in full, and helping trustees to do that."
Schemes commonly use funding-level triggers to instigate discussions around derisking, if not outright action. Susan McIlvogue, senior actuarial consultant at Hymans Robertson, said triggers should be used thoughtfully, ensuring actions taken in response to the changes were appropriate and proportionate.
“Blind triggers tend to be set around funding level – so if your funding level’s ahead of where you want to be, a predefined action is put in place and there's no intervention, it’s just implemented,” she said, adding: “The funding level could be ahead of where you want to be for a number of different reasons.
“If you’ve agreed an action to reduce the growth assets but actually your funding level’s ahead of where you want to be due to interest rates and your growth assets have remained static, is that really the right time to reduce your growth assets?”
Peter Askins, director at Independent Trustee Services, said consultants should simplify the options given to trustees. He gave the example of technology allowing trustees to view their funding level on demand, saying it may lead them to lose sight of their objectives.
“I look to them to provide a lead and a steer and strategic options for us as trustees to consider in our very time-constrained arena,” he said.
The report also found 58 per cent of trustees wanted instant funding-level updates above other types of information, whereas 14 per cent wanted the ability to quickly assess scheme sensitivity to market movements. A further 7 per cent wanted to be able to check projected cash flow.
