For pension scheme trustees undertaking a scheme valuation in 2015 must wonder what they did in a previous life to upset the pension gods. Now facing historically low gilt yields, trustees were looking in 2012 at similarly terrible investment conditions and 2009 they were caught in the teeth of the financial meltdown.
What to do?
In our experience, we are seeing trustees and their sponsors looking to ensure that they find a way of working collaboratively, that risks are identified and managed (no unrewarded risks – a subject for another time), yet still taking some degree of investment risk (our old friend proportionality).
Trustees also need to be looking at their risk register and asking themselves, what if:
- The employers covenant worsens (think Tesco)
- Gilt yields hover around where they are for the next three or more years
- Investment returns remain below the rate of return assumed in the valuation report
- A piece of the business (the most profitable) is sold off – what does that do the scheme liabilities and the employers covenant?
Some Trustee Boards take themselves away for a day, other undertake such mind mapping exercise before starting the business meeting for a couple of hours. There is no right or wrong way of undertaking such exercises. In our view, the meeting needs the Chair or, if budget allows, an outside facilitator to ensure that the discussions remain focussed and properly recorded. The most important result is to record the meeting outputs and the actions which need to be taken against them. These exercises are much more about the context in which the ‘thinking the unthinkable’ takes place, rather than developing complex (and expensive) modelling.
Scenario planning will not prevent a crisis but does give Trustee Boards the opportunity to think in advance about potential situations rather than being forced to develop policy in the go, which is never the best place to be.
We work as members of trustee boards and have wide experience of scenario planning; see our case studies. Why not contact us to find out more?