Deficits distract the majority of trustees from focusing on the ultimate goal of paying members’ pensions, recent research has found, but some experts highlighted the role of covenant strength and scheme size in deciding where the priority should be.
Trustees have a wide range of duties when it comes to running a scheme, and the rising cost of providing defined benefit pensions has increased the pressure.
Deficits are an easy and familiar measure, but as an industry we could do better
Calum Cooper, Hymans Robertson
Based on 100 trustees, the Hymans Robertson Trustee Barometer shows that deficits and discount rates are distracting 99 per cent of trustees from concentrating on paying pensions.
The report states that the data highlight a lack of leadership and “big picture strategic advice”.
It added that 23 per cent of the schemes surveyed “still lack clear goals”, while 94 per cent do not have access to formal valuation results within one month, “which impedes decision-making”.
Paying pensions is the primary goal
Calum Cooper, partner and head of trustee DB at Hymans Robertson, said the primary goal for trustees is to pay members’ pensions.
However, “the majority of the management information that trustees receive” relate to a scheme’s deficit.
This helps trustees decipher how much money they need from cash and investments to pay the pensions, “but it doesn’t tell you what your chances of success are, what the risk is and, more importantly, how you improve those two things”, he said.
“It’s an easy and familiar measure,” to look at the deficit, but it does not tell you how to solve the problem, said Cooper. “As an industry, we could do better,” with schemes taking a broader view and strategic approach while setting clear objectives, he explained.
Block out the background noise
Richard Butcher, managing director of professional trustee company PTL, said: “The majority of trustees are still lay trustees,” and many of them “are heavily reliant on their advisers”.
He noted: “If their advisers come to them with big numbers, and those big numbers show that they’ve got a big deficit, it’s not terribly surprising that those lay trustees then focus on those big numbers and those big deficits.”
It is important that the advisers make sure schemes are not placing too much focus on deficits, despite all the “press noise... and regulatory noise”, said Butcher.
He agreed that, as trustees, “you do need to have a strategic focus” and, to a certain extent, “you need to block out all the background noise”.
“That’s an incredibly hard thing to do, but it’s the right thing to do,” Butcher added.
Consider covenant and scheme size
However, Neil McPherson, managing director at trustee company Capital Cranfield, pointed out that the survey only looked at 100 trustees, while there are around 100,000 of them in the UK, “so it’s a pretty small sample”.
He said focusing on deficits all depends on the size of the fund. “If you’re a £10m scheme, your room for manoeuvre is a hell of a lot less than a £100m scheme,” he said.
“The other key driver is the nature or the strength of the covenant, and the risk appetite of the scheme,” which are both significant factors when it comes to how focused trustees are on the deficit, as opposed to “the longer-term integrated risk management”, said McPherson.
McPherson also noted that the report questions whether trustees have the confidence to challenge their advisers. He argued that professional trustees are there to "have the confidence to challenge the advisers… and they do provide the strategic leadership” the survey says is necessary.
Is it time to stop worrying about deficits?
Rising yields mean UK pension deficits are finally shrinking again, according to several industry monitoring systems, but is the defined benefit sector spending too much time concentrating on shortfalls?
The trustee should set the strategy
Adrian Kennett, director of Dalriada Trustees, said he is not sure that current deficits are a distraction. “A lower-yield, improved-longevity backdrop is a current reality which wasn’t foreseen when these schemes were set up,” he said.
Kennett observed that given current market conditions, much of the focus at the moment is on scheme cash flow rather than longer-term objectives.
“Some of my clients are so far away from buyout, for example, that while that is a long-term objective and clearly part of the longer-term strategy, it isn’t something they would select from a list as an immediate concern,” he explained.
Kennett said the trustee should set the strategy, harnessing the input of its advisers where necessary and work collaboratively with the sponsor.
"It is the trustee which remains accountable to members for its strategy, not the consultant," he stressed.
