Six areas for a Trustee’s business plan review

Image        Recognising that some trustees may have already started their business plan review what are some of the issues that should be included in the list of actions for 2014?


Employers covenant  

As the economy starts to gingerly come out of the worst recession in living memory, trustees will need to keep a close eye on the strength of the employer covenant. Returning to growth is a critical time for many businesses; as the economy begins to pick up and the orders grow they may not have the capacity to meet the demand or quickly be able to increase that capacity. This may mean a loss of market share to the more flexible and agile companies that can meet the demand. Whilst some companies will have invested, and continue to invest in additional capacity and products, this requires confidence in the market and as well as the ability to deliver. Not all companies will survive the upturn.

Investment strategy

Much as though the phrase ‘take risk off the table’ has become a cliché of the investment consulting community Trustees in conjunction with their Principal Employer need to consider whether the current investment strategy is actually going to get them to their destination, be it self-sufficiency or buy–out.

This means, among other things, reviewing the Trustees own investment beliefs. This is a critical discussion which allows the investment strategy to be developed, for example:

  • Do they believe that growth assets such as listed equities are likely to deliver a higher return, over the long term, than government bonds or cash but with a higher level of risk, especially in the short term and when compared to the Scheme’s liabilities
  • Do they believe that active investment managers can add value when financial markets are inefficient? If so do the Trustees also believe that active managers will, on average, underperform their representative benchmarks net of fees? From this are the Trustees are only willing to pay high fees if they have strong grounds to trust a manager’s ability to achieve a higher net return than a lower cost solution, such an index tracker?


Member data

The decisions which trustees reach are based in a large part on the member data held by the administrators.  Improving the quality of pension schemes’ record-keeping is a key priority of the Pensions Regulator, which earlier in January 2014 urged schemes to continue the drive to make improvements following the launch of its consultation on DB regulation. This is despite the Pensions Regulator shelving plans to set targets for scheme conditional data as it did for common data. The point is that scheme member data is important (see the CBC blog for more information).


Scheme governance

The Trustees should review the governance of the Scheme to ensure that they have the policies and procedures in place to monitor and check that the Scheme is being managed effectively and efficiently. Good practice is by definition always developing. The Trustees should consider how they can ensure that they have high quality governance systems, how this is applied when working with their advisers and how the scheme governance transmits confidence to scheme members that they will be paid their correct benefits at the correct time.


The impact of more legislation

From 2016, the single tier State Pension is introduced. For the Schemes who provide bridging pensions the trustees need to consider how the rules need to review the Scheme policy and possibly the rules. The potential of equalisation of Guaranteed Minimum Pensions remains a work in progress for the Department Work and Pensions. The draft methodology produced in 2012 was kicked into the long grass and we await another attempt. In our view unwelcome though this is, trustees need to keep the matter on their radar. The Disclosure Regulations are also due to be updated from April 2014. Whilst most of the changes are optional, time needs to be set aside to review what actions, if any the trustees wish to take.


Trustee training

Whilst the Pensions Regulator’s Trustee Toolkit is a useful (and free) trustee education tool, the benefits of a full Got, Gap, Get analysis of Trustee knowledge and understanding should be on most Boards business plans. This is a valuable tool to measure and identify not only at an individual but at a full board level areas which the training budget needs to address. The importance of Just in Time training at trustee/committee meetings, for example just before a scheme valuation, should also not be missed.


Time spent on planning is seldom wasted. Trustees should be encouraged to make the necessary time investment to think strategically. Let’s go to it!


February 2014


Pensions schemes and poor data – why is it and how to sort it

ImageIn July 2013, the Pensions Regulator released a report which made for disappointing reading. Despite all the efforts to date, many schemes are still falling short of the standards The Pensions Regulator has set for measuring data quality and maintaining accurate records, despite steady improvements in some areas.

In 2009, The Pensions Regulator issued good practice guidance about scheme data and subsequently set targets for schemes to meet its ‘common data’ standards by the end of 2012. These standards relate to the members name, date of birth and National Insurance number, which is a key tool in the identification of individual scheme members.

Clearly, the Pensions Regulator is underwhelmed with the findings and has threatened that if schemes have failed to meet targets for keeping accurate records then it will begin to issue improvement notices and if that does not work, financial penalties on pension schemes.  

For those smaller pension schemes, without access to sufficient resources are the ones causing the Pensions Regulator the biggest headache. They are more likely to be part of the two million or so members where common data has not been measured or significant improvements are required to meet the standard set of 95% having data stored. There is also the issue that the scheme conditional data, that is data specific to the individual scheme, is still not what it needs to be. This is particularly important if the there is a scheme valuation, or even more importantly, a buy-in or scheme wind up in the offing.  


Not surprisingly then, the Pensions Regulator has timetabled the end of 2013 to publish the results of its detailed record keeping review and the accompanying guidance.


What do Trustees need to do?

First and foremost trustees need to accept that administration needs more air time both in meetings and outside of them.


The data used by the administrators is a living thing, it changes (members die, re-marry, leave, move address etc) and corrections to earlier administration errors are made almost daily. As many decisions relating to the scheme are based on the member data, valuation assumptions, investment strategy for example, having the best data available is much more than a ‘nice to have’ it is essential.


From this, trustees need to engage with their administrators to develop a plan for both monitoring and improving scheme member data. In turn, administrators need to be open and   

honest with their clients so that they are seen as part of the solution, not the problem. In the past, it has been too often the case of trustees and their advisers, shooting the messenger when the administrator reports data problems.


There are tools in the box to use. For example monitoring pensioner deaths is going to bring benefits not only in having more accurate pensioner data but also as a weapon against scheme fraud. Contacting deferred members may also flush out deaths where there is an immediate benefit payable but then no further scheme liability. Asking active members to ensure that details of spouses are accurately recorded could influence the potential scheme dependents pension liability. A simple review of whether a data item is stored in a database is not sufficient – there needs to a check made to ensure that the item makes sense. The use of dummy data  was prevalent in the not so far off past, such as NI numbers based on a universal date of birth NI01010000F denoted a female and ending in M a male. Such data needs to be identified and cleaned.


All of this requires a budget and in these times, there are competing needs both for the scheme sponsor and the trustees. But not having a budget, both financial and in time, is a false economy and could well end up costing more money with data having to be put right when the clock is ticking.

Pension Trustees – the same but different

Every pension scheme is different. It follows then, that every group of trustees is different, in the issues that they face in their schemes, the relationship with the sponsoring employer, the members and other stakeholders.

That said, there is a great deal of evidence, not only in our own experience but across the pensions industry, that trustees share more things in common than might otherwise have been thought.

The most common concern is the negotiations which have to take place with the sponsoring employer when the results of the scheme actuarial valuation are in. Some of the concerns are about dealing with conflicts of interest, others about trying to balance the views of the different stakeholders including the Pensions Regulator’s wish to see the funding deficit cleared as soon as possible. From this it seems clear that shared experiences are invaluable.

Keeping to the subject of the Pensions Regulator, like most regulators, they find themselves between a rock and a hard place. That said, some of the war stories about the Pensions Regulator seem to suggest that they are sometimes struggling to maintain the delicate balance of their primary concern of safeguarding member interests, with demands upon trustees and financial pressure put on the sponsoring employer. Having witnessed these issues at first hand, resources, and in particular of these, time, has to be committed to reach a satisfactory conclusion. Most trustees realise that an operational sponsor is of much greater value to them than a bankrupt one who was forced into paying off debts too quickly. Getting that point across can sometimes be trickier than it should.

Scheme investments concentrate the minds of most trustees. Those with defined contributions schemes have concerns about their default fund, whether it’s appropriate to the members, represents fair value for money and that the membership understands how it works. Since defined contribution schemes provide benefits based on contributions paid in + investment return earned – fees and charges, communicating this to members in an effective way can take up huge amounts of time and energy. Trustees with defined benefit schemes, where investment growth is needed to help reduce the deficits, spend considerable amounts of time looking at investment strategy and asset allocation. This is a sea change from not that long ago, when trustees spent too much time looking at individual stocks and shares, not on the planning and monitoring of the scheme investment strategy. Coupled with the increasingly complexity of investment solutions in the market, the management of scheme funds is an area where the trustees need to be able to rely on the support offered by their advisers.

Talking of advisers, one area which concerns many trustees is the fees being charged and the service provided by some of them. Here at least, the answer is reasonably straightforward, if the fees are not transparent, fair and agreed, or the work is not tailored to the needs of the trustees, think about finding an adviser who will work to this fee model. It’s important not to say goodbye to an adviser solely because of fee concerns but many trustees need to understand their advisers better and advisers better understand their clients.

It was often said that pension scheme trustees didn’t have to be mad to do this, but it helped! What is true is that the demands put upon trustees have increased dramatically over the last ten or even five years and many feel that they are struggling to do the job as well as they would like. Keeping up to date with changes in legislation is hard enough for the pensions industry let alone for those for whom pensions is not their day job. The e-learning tool from the Pensions Regulator is a start but does not suit everyone. There are also concerns about generic trustee training, which has its place, but is not suitable for trustees facing specific scheme issues, when the scheme rules may limit the choices open to the trustees. There is an increasing trend for ‘just in time’ training for trustees, such as before kicking off a scheme valuation or investment review. For this to work effectively, the trustees need to have someone maintaining the year planner to ensure that opportunities are not missed.

Trustees are concerned about how members perceive their benefits, if they can demonstrate they are acting professionally, planning for the future including succession planning for when their terms of office expire or they move onto new employers. Trustees are constantly looking for effective ways to engage with their members, partly because it helps in getting messages across but also because members may become trustees in the future.

From this, trustees have lots in common with each other, whether for a large, medium or small scheme. There are differences, but these are out weighted by the similarities. One thing is common, trustees need the support of a trusted adviser who is not conflicted by other scheme relationships and who can help trustees in their duties, responsibilities and obligations and in so doing ensure the trustees deliver their agreed strategy.

Sounds like a plan?