The big issues

Chris Panteli: What do you see as the main issues currently facing UK pension schemes?

Paul Bourdon: One of the main issues is scheme specific funding, where the employer and the trustees have to agree how any deficit will be made up and over what time period. This can lead to some fraught discussions, but, if resolved, will encourage greater cooperation between the corporate sponsor and the trustees on the management of the scheme, even though the trustees still retain the final say.
Another issue is bringing in the use of derivatives to manage a scheme’s liability risks and possibly to manage the portfolio of assets. In addition to derivatives, there is the need for schemes to include alternative asset classes in order to achieve a more suitable risk/return profile for the portfolio.
Trustees do not necessarily have either the time or the experience to deal with these issues, which means more ‘governance headaches’. They increasingly need expert help.

CP: Do you see any European trends becoming more commonplace in the UK? If so, what are the drivers?

PB: Yes. The pensions industry in Holland has shown much greater comfort using derivatives and alternative asset classes. They have also moved more readily to using the skills of fiduciary managers to run portfolios and make decisions about strategic and tactical selection of investment managers. We expect to see similar developments in the UK market, driven by the need to exploit the proliferating range of assets now available to enhance returns while using a fiduciary solution to manage the increasing complexity of the portfolios effectively.

CP: What exactly does fiduciary management entail?

PB: Fiduciary management aims to ensure a pension fund’s diversified portfolio is properly managed in terms of both investment ideas and practical operational support. Credit Suisse would take on, in effect, the role of the pension fund trustees’ investment sub-committee, overseeing the investment proposition at every level: strategic, tactical and operational. But the trustees are still ultimately responsible for the running of the fund. Just as an investment sub-committee typically has delegated powers to make some decisions, and refers others to the full trustee board for approval, so we would draw up an agreement outlining where Credit Suisse has delegated authority and where it can only recommend.
The service can range from part fiduciary to a full, one-stop solution, taking overall responsibility for fund management, including the appointment of specialist managers. At Credit Suisse we adopt a multi-fund approach, advising on the full range of investment opportunities and risk control issues, including multi-manager, core/satellite, liability-driven investment frameworks, multi-asset class solutions, and the use of derivatives and alternative assets, as appropriate.
The first component in a fiduciary proposition is to analyse the fund’s asset and liability profiles to determine the best way forward, which could include the use of a liability-driven investment framework. Analysis and proposals for an investment strategy centre around return objectives, risk budgeting, appropriate asset classes, and relevant benchmarks. We would then make asset allocation decisions to reflect the fund’s profile and its objectives, while supporting the scheme and its sponsor with advice on legal and regulatory issues, and providing strong client servicing.

CP: Is there a disconnection between what sponsoring employers expect and what trustees want from the pension scheme?

PB: Let’s consider the aims of both. A scheme’s trustees want to ensure sufficient funds to pay all the benefits. An employer wants to reduce both the risk that they will be asked for special contributions at some time in the future (again, if the scheme is currently in deficit) and the impact of the scheme on its balance sheet.
The difference between what is manageable and acceptable can clearly lead to a “disconnect”, but scheme-specific funding will bring discussions of these differences to a head and be resolved, possibly with the help of The Pensions Regulator.
There are signs that the marketplace is developing solutions. A credit insurance vehicle was announced very recently in the trade press aimed at protecting pension funds against the risk of corporate bankruptcy. This will allow trustees to have the full comfort that the liabilities of the scheme are covered in the event of the default of the company.
What is the best way to decide what risk a company can afford?

Bourdon: We believe the impact of the current strategic asset allocation and management of a pension fund on the likely future contributions, when looked at against the free cashflows of the sponsoring company, sets out the framework for answering whether the risks are suitable.
Clearly, the funding of the pension fund, its size relative to the company, whether it’s open or closed, and its maturity will all impact on the distribution of future pension contributions too.
It is then a question of agreeing on risk budget and managing the portfolio accordingly, both in terms of liability and asset risk.

Paul Bourdon is managing director and head of Credit Suisse European Pension Solutions Group