The last few months has seen pension scheme crisis headlines screaming out every time you turn on the TV, pick up a newspaper or look at social media. The funding issues around the BHS scheme and other schemes coupled with the growth in the funding shortfall of just shy of £1trillion (£1,000 bn) places pensions even more under scrutiny.
As a trustee of a defined benefit pension scheme, we have a key role in helping your pension scheme get back into the black without breaking the company. What should you be doing other than looking to wind up the scheme? Here are five actions to take:
1. Know your sponsor’s covenant
This is critical for trustees see also ‘it’s all about the employer covenant’. In a post Brexit world do you know what the impact of leaving Europe is likely to be on the sponsor’s business both short and medium term? You need to understand the ability of the sponsor to continue paying contributions to the scheme. If the finance director talks solely in terms of EBITDA, off balance sheet finance or cost of debt ratio and you don’t follow – ask them to explain this again until you do understand. There are no excuses for trustees who fail to understand the sponsor’s covenant and have an investment strategy and funding that fail to take this into account.
2. Have a balance of powers document
If you don’t have one already, you should ask your scheme legal advisers to draw up a balance of powers document. This will show the powers you have as Trustees and those which the sponsor has. Relevant examples are whether the trustees can call a valuation out of the three year cycle or if you can set the employer contribution rate without first seeking the sponsor’s agreement. Having this clarity now makes future decision making easier.
3. Deal with conflicts of interest
Identify any actual or potential conflicts of interest. These could be where the same advisers work for both the sponsor and trustee or a potential conflict, where two trustees who in their day job, one of whom reports to the other. It’s always best to think and plan how you are going to deal with such issues now. Make sure you have a policy in place to identify and deal with them.
4. Dealing with the deficit
Talking to members about deficit in the pension scheme is tricky, but needs to be done. As trustees we are always looking to balance the message which is usually somewhere between ‘we’re doomed Captain Mainwaring’ and ‘don’t panic’. The tone needs to reflect the current position without pensions jargon in order that the message is honest, truthful and clearly understood.
5. Have an audit trail
The need for an audit trail and the reasons why decisions have been taken has never been more important. This may not be the most exciting topic for trustees, but it could save a lot of time at a later date. Your scheme secretary should be charged with reporting this at each meeting as a standing agenda item.
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If any of these sound something that your trustee board should be exploring more deeply, but don’t know how to – give us a call on 0845 4334 199 or contact us at firstname.lastname@example.org and find out how we can make a positive difference to your trustee board.