We have discussed before about the use of Integrated Risk Management and this blog returns to the subject on the back of the recent 2016 Annual Funding Statement from our friends in Brighton.
In essence, the expectation is that despite larger deficits in pension schemes, employers are expected to be able to increase their contributions to the scheme without affecting company growth plans. In a post seismic vote world to leave the EU you pays your money and takes your choice as to what the short, medium and long term impact of this will be for employers’ prospects of funding pension schemes in the UK.
One reality that does remain the same is the expectation that the open and collaborative working together between the scheme sponsor and trustees expected by the Regulator will continue. A second reality we would suggest is the scheme sponsor’s wish for a more stable balance sheet will be part of the equation for the foreseeable future. Possibly more controversially, we suggest that waiting for gilt yields to revert to ‘normal’ levels remains as fanciful as it ever was and alternative ways of funding the gap between scheme liabilities and assets have to be developed.
Essentially, trustees should not take more investment risk than the sponsor’s covenant can stand. In other words, if the investment strategy does not produce the expected returns and the sponsor can’t write the cheque to put the scheme back to where it started, trustees should not be implementing the strategy. From this, it seems to us that the Regulator’s model which gets rolled out at every opportunity by trustee and sponsor advisers will continue to be as important as ever and for good reason – it works.
The need for trustees and scheme sponsors to work together, sharing the same long goals (buy-out in X years, or funding above technical provisions by an agreed date etc) and having a plan which is proactively managed remains the key to funding scheme deficits in the future. Members are depending on it.
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