Xerox MNT constituency opened up for all members

Trustees of the £3.1bn defined benefit pension fund have also significantly reduced the scheme’s equity exposure and increased its allocation to diversifying investments in a bid to reduce volatility

Eleven per cent of UK DB members are active, while 41 per cent are pensioners and 48 per cent are deferred members, the Pensions Regulator’s 2018 DB Pensions Landscape report has shown.

Given the reducing number of Xerox employees who are members of the scheme, the trustee decided to broaden the Employed Member Constituency to include all scheme members

Xerox Pension Scheme

The Xerox Pension Scheme membership comprises 5 per cent employed deferred members, 63 per cent pensioners and 32 per cent deferred members, according to its November 2018 newsletter to members.

It is managed by a trustee company, Xerox Pensions. The board is made up of eight trustee directors, including four company-appointed trustees, one independent trustee and three trustees who are nominated by the members of the scheme.

A bigger talent pool

The Xerox scheme’s MNTs are selected from two constituencies. These were referred to as the Former Employee Member Constituency and the Employed Member Constituency.

The Former Employee Member Constituency covers deferred and pensioner members of the scheme who are no longer employed by Xerox, while the Employed Member Constituency covered members of the scheme still working for Xerox.

However, an August 2018 scheme newsletter stated that, “given the reducing number of Xerox employees who are members of the scheme, the trustee decided to broaden the Employed Member Constituency to include all scheme members (whether they are currently employed or formerly employed by Xerox) and change the name to the Member Constituency”.

This means that it no longer includes just the small group of members who are Xerox employees, which make up around 5 per cent of membership.

The scheme has kept the Former Employee Member Constituency, as two MNTs currently on the board were selected from that constituency.

Principles of proportionality

With an increased regulatory focus on trustee knowledge and understanding in recent years, combining skill sets and different perspectives is seen as important.

Generally, when it comes to appointing MNTs, the more members there are to choose from, the bigger the talent pool.

The Pensions Regulator highlights that trustees may use constituencies in an MNT nomination process. These can be divided by, for example, category of member or by scheme section.

When considering the use of constituencies, “trustees should have regard to the principles of proportionality, fairness and transparency”, the watchdog states on its website.

For example, it notes that it would not, in general, be fair for a constituency of 100 members to nominate two MNTs, and a constituency of 10,000 members to nominate only one.

David Brooks, technical director at Broadstone, said: “Changing constituency is part and parcel of the process of ensuring the balance and participation of the members is fair.”

He added: “Ideally you would want all MNTs appointed in line with the same constituencies. However, MNT terms of office will often fall out of sync, and so a piecemeal approach has to be adopted.”

In line with the regulator’s guidance the process should be pragmatic and transparent, and provided the change is timetabled and communicated the expectations of members can be managed, Brooks said.

DB membership has changed

Steve Delo, managing director of trustee company Pan Governance, said that, “many schemes have, historically, drawn MNTs from active members with a voting constituency of actives and pensioners”.

However, with DB schemes closing and maturing, this has moved to ‘active’ deferreds – ie deferred members still in the company’s employ – and pensioners.

“With the ‘active’ deferred universe reducing through departures – and the full deferred universe growing – constituencies tend to be looked at and in many cases widened to the full membership,” Delo said.

“I have a couple of schemes where there is virtually nobody still working in the company that is in the DB scheme. Indeed, one scheme where there is not a single member of the scheme employed by the business,” he added.

Selection or election?

The scheme’s MNTs are appointed by selection and a panel has been set up to oversee such appointments.

One MNT is selected from the new Member Constituency and two are selected from the Former Employee Member Constituency.

The Xerox scheme’s selection panel included an existing MNT director, the scheme’s independent trustee, and the legal adviser to the trustee.

Under the Pensions Act 2004, schemes are required to make sure at least one-third of trustees, or at least one-third of directors of the trustee company, are nominated by the scheme membership.

MNTs may be chosen by a selection panel or directly elected by the membership.

Delo said more and more schemes are moving towards selection, through interviewing nominees, as opposed to election for their MNTs.

“I personally favour selection exercises as, run properly and fairly, they can be used to get new MNTs that fit the requirements of the trustee board - maybe filling skill gaps, adding a particular mindset or improving diversity,” he said.

Brooks agreed: “Selection panels, choosing from candidates nominated by the members, is still the most effective way of ensuring the needs of the members and boards are met”.

The Xerox Pension Scheme has also written to members about some changes to its investment strategy.

Taking advice from its investment consultant, Redington, and in discussion with the company, “the trustee decided to make a number of important changes to the scheme’s investment strategy”, according to its November newsletter.

This has included a reduction in the proportion of the scheme’s assets that are invested in equities. Its equity allocation has decreased over time; it is now around 15 per cent, down from 24 per cent in 2017 and from 44 per cent in 2013.

The trustees also decided to increase the amount invested in diversifying assets, to which it now has a 34 per cent allocation, up from 7 per cent five years ago, and around 17 per cent in 2017.

“Diversifying investments typically have a low correlation with equities, bonds and cash and can help to reduce the volatility of the value of the scheme’s assets,” the newsletter explained.

There has also been a reduction in the sensitivity of the scheme’s funding level to changes in interest rates and expected future levels of inflation.

Currently, around 90 per cent of the liabilities – on a technical provisions basis – have been hedged against changes in interest rates and inflation.

“It is intended that the level of ‘immunisation’ will keep step with improvements in the scheme’s funding level,” the newsletter added.

John Walbaum, partner at consultancy Hymans Robertson, noted that schemes may significantly reduce their equity exposure as part of a longer-term strategy, while others may have some shorter-term market-driven reasons.

“If you think about it strategically, equities are quite volatile, and have had a very strong run over the last 10 years, pretty much – post financial crisis,” Walbaum said.

Schemes could take a view that equities might be reaching the end of that run at some point, “and therefore it would be sensible to reduce reliance on equities and potentially think about investing in some other assets that might not return in the same sort of way as equities – so they would be diversifying assets of some sort”, he added.

There could also be shorter-term, tactical reasons for reducing equities. For example, some schemes may be concerned that we could be entering a period of volatility surrounding things like Brexit, and “there might be a fear that equity markets might suffer in that context”, Walbaum noted.

DB pension funds have increasingly shut to new entrants and to future accrual.

“As schemes mature, it’s natural that the asset allocation will evolve as funding levels improve, and they perhaps don’t need quite so much return to bridge funding shortfalls, then clearly there’s a rationale for moving out of equities and into other asset classes,” said David Will, senior investment consultant and head of manager research at JLT Employee Benefits.

In particular, there has been an increase in scheme exposure to bond holdings or liability-driven investment solutions to manage liability risk, Will noted.

“That’s certainly been one of the sort of long-running themes now, and I think that’s set to continue. However, more recently I think we have seen schemes being quite conscious of the decade-long bull market in equities – up until the end of September, you might say,” he said.

By some measures, and according to some commentators, equities are being viewed as expensive, said Will, so “it’s natural that schemes have looked to move some of the allocation away… and reallocate elsewhere”, such as alternatives