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Gerald Smith comments on current issues facing Trustees of defined benefit pension schemes

8 September 2011

Following the arrival of the Pensions Regulator on the pension’s scene there was much speculation that servicing obligations to defined benefit pension schemes would sound the death knell for many UK corporate employers and would blight much corporate deal making.

However, despite the utterances of gloom and despondency among observers, I would contend that the Pensions Regulator has brought much that is good to highlighting and addressing pressing problems for pension scheme trustees which far outweighs anything negative that has been said.

The Pensions Regulator identified that funding, trustee knowledge and scheme administration were key areas of weakness and progressively each of these issues has been or is being addressed.

As a consequence pension trustees have become much better equipped as key stakeholders. Similarly, advisers both corporate and trustees, have become far more proactive in finding innovative solutions to address issues facing employers and trustees especially in the areas of funding and risk.

However, given the ongoing economic stagnation and the adverse effects of government cut backs, despite low interest rates and assurances of ongoing support from funders, we consider that trustees and employers will need to work ever more closely together to ensure that pension scheme obligations are being addressed.

From a corporate perspective the employer will continue to search for ways to de-risk and minimise the obligations to its pension scheme.

From a trustee perspective, whilst their primary responsibility is to the scheme membership they must be mindful that it is the employer that underwrites the obligations of the scheme and accordingly trustees will need to continue to adopt a robust but pragmatic approach to issues faced by the employer.

From an adviser perspective, whilst this is a sector of continuing change and innovation, it should not be regarded as a ‘bottomless pit’ as far as professional fees are concerned. Much of the work associated with the administration of pension schemes can be regarded as routine and undoubtedly trustees will look to use competition amongst advisers to reduce costs.  It is evident that, as part of the improvements in trustees’ knowledge, trustees have also become more astute in their approach to professional fees, as have the employers who ultimately foot the bill.

Of critical importance to the trustee is understanding how the scheme employer is managing its cash. If cash surpluses are being generated, how are these funds being utilised?  Is the employer repaying bank debt or dividends and, if so, is the scheme getting its fair share?

Trustees need to be equally vigilant if the employer is entering a period of re-finance. Market conditions for refinance have changed dramatically in recent years with funders adopting a far more cautious approach. As a consequence terms for refinance will be potentially far more onerous than the highly leveraged low interest deals that were available 5 to 7 years ago.

As a consequence trustees must ensure that they understand how any refinance may affect the employer covenant. If the affect is adverse, for example a change in priority, what if any mitigation can be secured by the trustees. For this the trustees may need to take professional advice on employer covenant which will facilitate securing a place at the negotiating table as a key stakeholder.

Trustee understanding of the employer covenant has long been a key driver for the Pensions Regulator and in the current turbulent times there is strong evidence that trustees of pension schemes are clearly getting the message. 

If you or your client need to discuss any of the issues above, please contact Gerald Smith on 0121 710 1680 or by email using the online form below.