DB pensions - is a change in focus needed?
09 Mar 2017 - Estimated reading time: 2 mins
Defined benefit pensions are not for the short term. Trustees must plan their journey looking to the future and the long term so they get to the right destination, at the right time. It’s a careful balancing act with a myriad of challenges along the way. 21st Century trusteeship is complex and trustees are increasingly needing to adapt and evolve into sophisticated risk managers.
For the last few years The Pensions Regulator has emphasised the importance of integrated risk management. This means carefully weaving together covenant, investment and funding risk to achieve better member outcomes in the long-term. In our third annual trustee barometer, trustees told us their biggest challenges are knowing when to de-risk (60%) and implementing a fully integrated approach to risk management (57%).
The ultimate destination for a trustee is paying benefits to members. It was a surprise to find that only 1% of trustees focus on the probability of paying pensions as a key measure.
So are trustees focussing on the wrong things? This year deficits, discount rates and regulatory compliance have dominated trustee meetings, as well as news headlines. Instead the focus should be on what really matters – paying benefits to members. Trustees and sponsors should measure the chance of paying benefits in future and the risk of things not going to plan. These key measures should drive decisions on contributions and investment strategy, rather than one dimensional discount rates and deficits. By measuring the right things, covenant, investment and funding risk are automatically weaved together.
Trustees have described this shift in focus as a breath of fresh air and I can understand why – suddenly advisers are talking in a language that everyone can understand and the conversation returns to what matters most, paying benefits to members.