How trustee/sponsor collaboration is improving valuations
Research shows employers are taking a more active role during the valuation process.
Employers are taking a more active role in discussions on investment strategy during the valuation process, according to research. Stephanie Baxter analyses the findings.
- Engagement between trustees and sponsors is increasing
- Dissatisfaction with valuations higher among larger schemes
- Embracing integrated risk management but room for improvement
Negotiations between trustees and sponsors during the scheme valuation process can be tricky particularly if there is a lack of engagement and a poor relationship.
However, research by Punter Southall published in February found sponsors and trustees have been working together more closely during the valuation process with positive results and higher levels of satisfaction.
The consultancy's defined benefit (DB) scheme funding survey 2015, which quizzed 130 trustee and corporate decision-makers between September and November 2015, found one fifth of schemes were less satisfied with negotiations with the trustee or employer in 2015. This was a clear improvement compared to the firm's 2012 survey, in which one in three respondents described the process as problematic.
Last year around one in six respondents were less than satisfied with their overall scheme funding valuation experience, while one in four said they were ‘merely satisfied'.
More engagement
Collaboration between trustees and employer was highlighted by 27% of respondents as a factor that made a positive difference to the valuation process. Other factors included the quality and clarity of advice and information from advisers (20%) and clear communication, transparency and sharing of information between parties (18%).
The survey also found employers were taking a more active role in the investment strategy, with almost a fifth in the driving seat, including 6% leading the discussions, 7% countering trustee submissions with its own proposals, and 4% putting forward their own views in advance of trustee proposals. Just over half of all respondents said the employer actively contributed to discussions, while 31% said the employer was consulted but not involved to any further degree.
This showed employers have been going above and beyond the legal minimum, which only requires that they should be consulted on investment matters.
Principal and head of research Jane Beverley said during a briefing on the survey that sponsors having a more active role in setting the investment strategy was a "good thing", "healthy" and that more should consider doing so. She also said trustees should involve employers early in discussions and training around investment strategy.
Covenant adviser Lorant Porkolab added that collaboration was much higher than six to seven years ago, as employers realise they need to work with the trustees.
Reasons for dissatisfaction
Where dissatisfaction was reported by respondents, the firm found that level of engagement with the sponsor was often given as the main reason. Without proper levels of engagement and education the sponsor can see the pension scheme as a burden they would like to get rid of, according to the report.
Dissatisfaction was higher among larger schemes, with 30% of those with more than 5,000 members saying they were less than satisfied with the trustee/sponsor negotiations, compared to 15% for mid-sized schemes with 1,000-4,999 members, and 13% for small schemes with fewer than 1,000.
This trend also occurred for other specific aspects of the valuation process such as sharing information with the trustee/employer, with 22% of respondents from large schemes saying they were dissatisfied compared to just 12% for mid-sized schemes, and 4% for small schemes.
Possible reasons for greater dissatisfaction among bigger schemes could be internal governance, number of advisers, corporate structure, and regulatory engagement, said the firm.
Interestingly, respondents whose schemes had funding levels between 80% and 100% were less satisfied than schemes in a really bad position. Beverley said this was probably because trustees of schemes in a very bad position know they will not achieve much from the valuation so they will have relatively low expectations.
New DB code
Nine in ten schemes were embracing the concept of integrated risk management (IRM) with 40% having a fully documented plan for this in place. The Pensions Regulator (TPR) describes this as part of good governance in its latest guidance on the DB code of practice.
Some 49% said they looked at risks in an integrated way but had not formally documented them, while just 11% did not look at risks in an integrated manner at all. Beverley said this suggested that TPR's guidance on IRM builds on what schemes have already been thinking about. However, given that just half have documented their IRM plan, there is clearly more work to be done.
When asked what changes they expected from the new code, 62% said it would increase focus on employer covenant, 40% cited more focus on risk assessment, 38% said more focus on investment strategy, and 38% said a longer recovery plan. A smaller percentage of 32% said it would lead to more engagement from the employer.
An independent trustee who was surveyed said TPR's guidance had allowed trustees and employers to take a more collaborative approach, which would not have been likely in 2011/2012. "This has resulted in sensible contribution discussions and work on employer covenant, guarantees and investment strategy rather than a polarised focus on contributions up front."
Having more engagement between both sides during these difficult negotiations could help reduce conflict and deliver better outcomes for schemes.
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