We have written several times before about the importance of trustees and their pension scheme sponsors having a shared goal in mind (If you don’t know where you are going any road will get you there). Much as though the phrase ‘a journey’ is grossly overused, it is starting from a place and ending up someplace else. In the context of a pension scheme this is usually either a full buy-out or some measure of self-sufficiency.
The good news is that a growing number of pension schemes do have some form of plan about the future. The best ones are written down, reviewed regularly and have triggers built in. This means that when something happens, trustees do something, even if it’s to agree not to do something.
The tricky bit which trustees and sponsors are beginning to realise is that monitoring where you are on the journey is not as easy as they first thought. The continued saga of low and lower gilt yields coupled with lower than anticipated investment returns mean that trustees and sponsors can find themselves at odds with each other. Trustees are forced to ask questions about increasing funding to the scheme or request some form of additional security to strengthen the employer covenant. If this comes at a time when the company is looking to use their capital on specific projects or restructuring, it’s pretty clear that there are some tough choices to be made.
Trustees and their scheme sponsors need to have advisers who understand the dilemma facing both side of the issue and not look to box either party into a lose-lose position. If either side believe this to be the case then they need to think about what the alternatives could like. This is demonstrating strength not weakness.
If the distance between where we are now and where we want to be is too wide what can be done? By taking a big picture viewpoint, a more holistic view of the issues, it is usually possible to figure a road map to the future. What do we mean by this?
Trustees should look at how they are running their scheme. Do they apply the same kind of budgetary controls that the sponsor’s shareholder expects of the sponsor? There is a need to look not only around the effective investment of assets but the scheme liabilities as well. This could include running a Pension Increase Exchange, buying out a portion of scheme pension liabilities or possibly an Enhanced Transfer Value exercise. By combining a number of different strategies the ability of the sponsor to write a cheque for the buy-out costs could just be a lot closer than would have previously been thought.
The most important point here in our view is that there is a continued dialogue between the Trustees and scheme sponsors, as the people who write the final cheque. If relationships between both parties break down, it is a lot more difficult to ensure that member’s interests are protected.
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