What’s the current situation with DB pensions?
We’ve all seen the big economic shocks of the last 12 months, but what’s interesting for UK DB pensions is the wide range of impacts on different schemes that this has caused.
There’s a broad spectrum of effects on schemes, with some benefiting significantly because of the way their investments have performed, and others that have found themselves in a materially worse place. Wherever you are as an employer, it’s a good idea to take a step back and do a helicopter review of your strategy.
What is your top tip for companies managing DB liabilities?
Be on the front foot. Hymans Robertson modelling shows that if companies are proactively engaging with their trustees, they can save up to 30% on their DB pension costs. That’s not about taking cost-cutting measures or adopting a high-risk approach. Savings come from the company and trustees sitting down early on, as there is a whole toolkit of ideas and resources that can be put to work. So it is worth engaging as soon as possible, and being transparent and open with trustees to make sure that the pension scheme gets to a good place, and that the strategy is aligned with the company’s objectives.
Why is proactive company engagement so important?
If the sponsor (the company) is not proactive then the trustees are effectively guessing what it is trying to achieve and they will end up defaulting to certain assumptions.
Without early engagement, trustees are going to develop strategies and ways of achieving benefit security based on what they know and the resources available, probably resulting in fairly standard ‘vanilla’ solutions.
But if the company is proactive, steering those discussions in a collaborative way, it is far more likely to end up with a balanced strategy that meets the aims of all parties.
There has been a lot of focus on corporate governance recently. What does this mean for DB pensions?
This is very much the case, and in particular there has been a strong focus on companies being responsible corporate citizens. The climate crisis and the challenges around equity and inclusion are amongst the most high profile issues, but the range of governance issues is wide.
Companies not only have to respond to these challenges but they must also be very transparent about their policies in relation to them. Equally, trustees are embracing very similar work with the pension schemes they oversee.
For example, trustees may have a particular approach towards investments from a climate crisis perspective which doesn’t necessarily align with those of sponsoring companies and can expose employers to criticism and reputational risk from members, shareholders or other interested stakeholders.
So alignment, or at least a good understanding of each other’s position, is really important. The cross-fertilisation of ideas between the trustees and the company, which can in some cases be achieved through representation on committees or other groups, can help make sure that thinking is joined up.
How is the cost-of-living crisis impacting pensions discussions?
This issue is very concerning for everyone in the pensions industry – trustees, companies, and advisers.
Sometimes trustees will have a unilateral right to consider whether they should be taking some action, perhaps via pension payment increases, to help support members. In other situations, trustees won’t have a unilateral ability to do anything, but they could do something if the company agrees
But if something is done, the liabilities of the scheme will potentially increase, and if there is a funding deficit that’s making the shortfall that will have to be addressed bigger.
From a company perspective, it should look at its broader policies – such as salary increases and other areas of its reward packages – and ensure there is a joined up approach with pension scheme options and decisions. The cost-of-living crisis is another example of why good governance and communication channels between the company and the trustees are important.
Is there any other advice you have for employers with DB pension schemes?
Check your funding level. If you haven’t been looking at how the funding of your scheme has developed recently, then you should do so as soon as possible. It is important to understand your current position and re-engage with your trustees if it’s been a while since you’ve done so.
And, irrespective of what you have been told about your scheme in the past and what you think the right solution may be, go into the process with an open mind.