Survey highlights lack of strategic leadership as the real pension deficit.

Key findings of Hymans Robertson’s third annual Trustee Barometer:   

• Paying pensions is not the key strategic driver for 99% of trustees;
• This highlights there is an over-reliance on volatile balance sheet deficits and discount rates, distracting from how best to secure members’ pensions;
• Over half of trustees (53%) believe their schemes could benefit from a slower and steadier approach, which is at odds with a short term balance sheet focus;
• More schemes are making longer term plans, but many still lack clear goals (23%), measurable plans (23%) and target timeframes (21%) to achieve their goals;
• The main barriers to reaching goals are: 94% don’t have access to formal valuation results within 1 month, which impedes decision making; 57% say taking an integrated approach to risk management is their biggest challenge; and only 9% recognise cashflow negativity as a strategic issue for their scheme.

The real deficit facing UK Defined Benefit (DB) pension schemes in 2017 is a dearth of leadership and big picture strategic advice, rather than the £790bn aggregate UK DB deficit, according to Hymans Robertson as it publishes its third annual Trustee Barometer. The Barometer, which seeks to understand current trends in UK trusteeship and the challenges trustees are facing, shows that they need more support on how best to prioritise and integrate covenant, balance sheet and cashflow risks. 

Commenting Calum Cooper, Partner and Head of Trustee DB at Hymans Robertson, says: 

“Given the purpose of a pension scheme is to pay pensions, it is surprising that this is not the key strategic driver for 99% of trustees. This highlights that when it comes to strategy, the industry still relies on volatile balance sheet deficits and discount rates. Focusing on these in isolation clouds the issue of how best to secure members’ pensions. Advisers have a responsibility to help trustees focus on the metrics that matter most – such as chances of success, levels of risk and members’ benefit security - to deliver the pensions promise.

Explaining how a focus on deficits distracts from taking a truly integrated approach to risk management, he added:

“Clearly trustees are still being advised to focus on the deficit position. While it is important, it should not be the primary driver of strategy. 57% of trustees said that showing their approach to funding is fully integrated remains one of their biggest challenges.  Yet discussions about technical matters like discount rates and inflation risk premiums perpetuates the deficit problem as it focusses time and effort in the wrong places, drowning out efforts to embed a fully integrated approach to strategy and risk. Reflecting on our past Barometer surveys and the Financial Conduct Authority’s ongoing review into the asset management and investment consulting industry – which questions whether trustees have the confidence to challenge their advisers - is the real pension deficit a dearth of inclusive, big picture advice and leadership? 

“At the moment, schemes may be unwittingly putting members at risk by failing to take a broader view and strategic approach. We believe that it’s our role, as advisers, to make sure that trustees are focusing on the strategy, risks and metrics that matter. Our definition of strategy is quite simple – it’s about how you get from A to B. Done well it requires clear objectives and a measurable plan to achieve them – with an understanding of chances of success balanced against the risks that can knock you off course. The Barometer findings show that many schemes are still leaving too much to chance.”

The in-depth survey of 100 pension fund trustees showed that 21% said that they had no specified timeframe for achieving their goals. This was a marked improvement on last year’s 33%.  While there is an encouraging shift towards longer term thinking too many trustee boards are not making plans. 

Commenting on long term planning and cashflow negativity, Calum Cooper says:

“Whatever the ultimate goal for the scheme, managing cashflow is integral to longer term strategic planning, as schemes need cash to pay pensions.  Only 9% of trustees surveyed (up from 4% in 2015) recognised cashflow negativity was an issue affecting their scheme, despite increasing numbers of schemes becoming cashflow negative. Our 2016 FTSE350 pensions analysis research showed 57% of FTSE350 DB schemes are already, or soon to be, materially cashflow negative – i.e. payments out exceed contributions in to the scheme. 

“Cashflow risk is an issue that still isn’t getting the recognition it deserves. That’s despite the Pensions Regulator highlighting that cashflow planning is vital to effective scheme management.  Schemes face an ever-growing mountain of cash commitments as members retire and benefits are due.  Once benefits in payment exceed contributions coming in, schemes will find themselves in the unfortunate position of becoming forced sellers of assets which, in a market downturn, could lead to substantial losses.

“If trustees aren’t putting an emphasis on cashflow negativity it is likely that their advisers aren’t either, again pointing to a lack of clear strategic advice.  They need to take a holistic, 360 degree view which looks at success, risk and security of members’ benefits in the long term, ensuring there is the cash to meet payments now and in the future.”

Looking ahead, Cooper concluded:

“With careful management most DB schemes are well placed to overcome the risks they face over the long term.  But there will be a difference between the schemes which are led by trustees that benefit from strategic and collaborative leadership and those that head blindly into the future without taking an integrated view.  If clear planning, long term goals and effective management of cashflow risk schemes are lacking, schemes could be vulnerable to unexpected events whether in the form of covenant change or a wider change in direction in economic policy.  The primary duty of care for trustees, working with their advisers, is to focus on delivering benefit promises to members.”