DB trustees and sponsors are collaborating more during valuations
Sponsors and trustees are working together more closely during the valuation process but larger schemes are less satisfied with negotiations, according to research by Punter Southall.
The consultancy's defined benefit (DB) scheme funding survey 2015 showed one fifth of schemes were less satisfied with negotiations with the trustee or employer in 2015, an improvement on the one in three in the firm's 2012 survey that found the process problematic. The firm surveyed 130 trustee and corporate decision-makers between September and November 2015.
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 schemes with 1,000-4,999 members, and 13% for schemes with less than 1,000.
Possible reasons for greater dissatisfaction among bigger schemes could be internal governance, number of advisers, corporate structure, and regulatory engagement, said the firm.
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'.
Higher engagement
Collaboration between trustees and employer was highlighted by 27% of respondents as a factor making 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 driving the 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 taking 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 is much higher than six to seven years ago, as employers have been realising they need to work with the trustees.
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 as they will have relatively low expectations.
New DB code
Nine in ten schemes were embracing the concept of integrated risk management with 40% having a fully documented plan for this in place - which The Pensions Regulator describes 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.
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.
Interestingly the survey found that nearly four in ten respondents said the latest valuation process took longer than previously, while just one in four said it took less time.
Almost 40% of respondents said their schemes did not have an end-game in sight, which increased to 44% for smaller schemes, while 18% of all schemes surveyed had no plans in place to consider de-risking.
When asked what changes they would make to their scheme's current or next valuation in light of the April 2015 pension freedoms, almost 40% said they would review cash commutation allowance, while 29% said allowance in funding basis for increased number of transfer values before retirement. One in four said they would make an allowance in funding basis for increased number of transfer values at retirement, while 24% would review mortality assumptions to allow for selection risk.
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