As Trustees we ought to know where we going. In the world post revised Code of Practice no. 3 – Funding defined benefits, it’s clear that collaborative working is what is expected between both Trustees and Sponsors. We believe that this means that the Trustees business plan reflects the sponsors plans for the scheme, whether it’s a buy out or self-sufficiency or some other target, and the timescale of this goal – only in that way can either party avoid unwelcome surprises.
In order that the Trustees can build or adapt their plan with the integrated approach expected by the Pensions Regulator they need to fully understand three essential areas and how this affects their thinking.
1. The Sponsors Covenant
The most important concern of Trustees is knowing and understanding the Sponsors cashflow and balance sheet. This may require them to take professional covenant advice, which even now some sponsors are not happy about. The outcome of the advice is that the Trustees should have a grip on whether the sponsor could increase pension contributions if the investments performed poorly or that the sponsor could pay more into the scheme now rather than later – if they haven’t then the money has not been well spent.
Knowing how much the Sponsor can afford to pay to the Scheme is essential. Whilst Trustees are not running the Sponsors business, an argument that investment in the business is a higher priority than paying money to reduce the deficit in the pension scheme is entirely reasonable. If the Sponsors Capital Allocation Policy is clear and adhered to there is much less room for mis-understanding. In turn, understanding the science behind the calculation of the Sponsor contributions will enable a better conversation with the Sponsor. This includes understanding the margins build into the calculations to allow for market swings and global events.
Understanding the required level of return from investments is a lot easier if the covenant and funding is understood. If, as Trustees, you know the target you are aiming for then you can build a strategy which reflects the degree of risk you are prepared to live with. Just as importantly, you need strong monitoring system to identify issues and take action before the plan is blown off course.
Business plans need to be constantly reviewed by Trustees, and increasingly Sponsors and Trustees meet to discuss how the business supporting the pension scheme is going. Trustees should be looking to make both of these events standard not just best practice.
An independent trustee who can demonstrate knowledge and experience and as importantly add value is a real plus for trustee boards.