Trustees and sponsors of pension schemes are encouraged to work together for the benefit of all stakeholders, and that includes the members. The first principle of the Funding Defined Benefits Code 3 from the Pensions Regulator states

“Working collaboratively: Trustees and employers should work together in an open and transparent manner to reach funding solutions that recognise the needs of the scheme and the employer’s plans for sustainable growth”.

Which is all well and good but how should trustees handle the situation where the sponsor has a very different view what the trustee’s investment strategy should look like? Whilst trustees have a statutory duty to ‘consult’ with sponsors, the Code suggests very clearly that trustees engage with the sponsor, even if there is no legal requirement to do so.

Some years ago, we were involved in a private equity deal (it was in the days when money was cheap) and the sponsor would have been laden with debt. In response, the trustees suggested that their investment strategy would switch 80% of the scheme return seeking assets to liability matching assets, with the resulting hike in sponsor contributions to the Scheme. The resulting conversations were hard and in the end the private equity deal fell away. If that situation occurred now, what should the trustees do?

There is now enough case law to support trustees taking employers interests into account when putting together the scheme investment strategy. In our experience, trustees fully understand that the best guarantee they have of paying member benefits in full is having a strong sponsor to support the scheme. Equally, employers are unwilling to tie up cash in a pension scheme that they want to use to develop their business and in so doing improve the strength of the employers covenant to the scheme.

Having been in the thick of discussions between trustees and sponsors about investment strategies we fully recognise that they can be challenging. If the trustees feel the sponsors covenant does not support the level of risk the sponsor proposes, then alternative solutions need to be found, and if contingent assets are thin on the ground, other solutions such as escrow accounts or negative pledges have to come into play. Trustees and sponsors can then agree to bank the credit when there is out-performance from the scheme investments or from the sponsor.

The point is that with good will on both sides, solutions can be found.

For a no-obligation discussion about our experience of how we have been involved as trustees in investment strategy discussions please contact us by telephoning
0845 4334 199 or email us at


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