Trustee Barometer 2017
What's keeping trustees awake at night?
07 Jun 2017 - Estimated reading time: 5 mins
A fair number of things judging by the results of our annual trustee barometer, published earlier this year. And given the environment they’re operating in now it’s really no surprise. An ever changing regulatory environment, continued uncertainty in the markets and a backdrop of high profile scheme failures have put the management of DB schemes well and truly in the spotlight. With tomorrow’s snap election looming, as well as the outcomes of the DWP’s DB Green Paper, uncertainty remains in the year ahead.
As a result, trustees face a complex range of issues and are increasingly having to become sophisticated risk managers, carefully balancing a myriad of challenges to ensure the best outcome for their scheme members.
Here are some of the key issues:
Taking the right risks at the right time: 72% of trustees would welcome more accurate funding data
We asked trustees how long on average it takes to get access to formal triennial valuation results?
To make the best decisions for their scheme members trustees need to be able to access up to date data. However, 94% of trustees told us they don’t get access to formal triennial valuation results within a month, with many trustees waiting 3, 6 or even 9 months to get the results. It’s very difficult to get clarity on affordability and risk when you’re using imprecise and outdated data. Perhaps unsurprising then that 56% of trustees told us that access to accurate data for decision-making was one of their biggest challenges. Without up-to-date and accurate data, how can trustees be sure they’re taking the right risks in the right proportions at the right time?
Taking a fully integrated approach: 57% of trustees told us having a fully integrated approach remains one of their biggest challenges.
We remain fully supportive of tPR’s encouragement for DB schemes to adopt a fully integrated approach - but clearly for many putting this into practice proves a struggle. To us, integrated risk management means looking at contributions, investment and covenant risk in the round. And by adopting a genuine, risk based approach which does this can materially improve outcomes for members. Our recent analysis actually shows that allowing for long-term covenant risk will guide many schemes to taking less asset risk, more time and to getting a longer term cash commitment. That means more certainty and stability for trustees, sponsors and members – and surely a better night’s sleep all round!
A few of our research results raised some areas that should be higher on trustee’s agendas:
Managing cashflows: whilst 57% of FTSE350 DB schemes are cashflow negative, only 9% of trustees recognise this issue affecting their scheme
Whilst we were pleased to see an increase in the number of trustees recognising the importance of cashflow risk management - up from 5% in 2016 to 9% in 2017 - there still appears to be a huge disparity in the number of schemes dealing with this issue vs. trustees considering it a cause for concern. Managing cashflows plays a crucial part of a scheme’s integrated risk management strategy and becomes even more important as schemes mature. Being cashflow negative could mean being a forced seller of assets in a market downturn, meaning you could run out of money and be unable to meet benefit payments as they fall due. Trustees need to ensure their assets are backing the cashflows they need to pay their members when they need it.
Focusing on the right things: 99% don’t focus on the probability of paying members’ pensions
The most surprising result from our research was finding that only 1% of trustees focus on the probability of paying pensions as a key measure. DB pensions are a long term game and a trustee’s biggest (and most important) responsibility is ensuring there is money in the pot at the end of the line. Deficits, discount rates and regulatory compliance have dominated trustee meetings (as well as dominating headlines!), clouding the issue and proving a distraction to what really matters – paying pensions. Trustees and sponsors should be focused on paying benefits and managing risks. These are the measures that should drive decisions.
Is too much being left to chance? 23% have no measurable plan to reach their goal and 21% have no specified timeframe for getting there.
Whilst 25% of trustees told us they were targeting buy-out, the numbers above raise concerns that too much is being left to chance for trustees to successfully achieve their goals. Regardless of the end-goal, it’s crucial you have a plan in place to reach it. A buy-in, or a series of well-planned buy-ins, could help schemes reach their goal with more certainty. Its crucial sponsors and trustees take proactive step to capture opportunities to transfer risk, as and when it arises. As many more schemes move toward buy-in or buy-out demand is likely to increase (and perhaps even exceed supply!) and those who are prepared will be at the front of the queue.
Whilst there is much uncertainty looming and no doubt further challenges will arise for trustees, by adopting the right approach we think trustees can weather the storm. Even in such a fast-changing landscape by taking the right risks at the right time, focusing on the right things and keeping your eye on the end goal can all help you become more resilient to risk. Furthermore with the right strategic approach and leadership, we believe trustees can thrive, and ensure they’re not leaving better outcomes for their members down to chance.