|
OPDU Report 25
- November 2008
This is my first year as Chairman of OPDU’s Advisory Council, the elected body which ensures that the services and insurance provided by OPDU continue to meet the changing needs of members. It has been a very eventful year for Pension Fund Trustees.. The current turmoil in financial markets has created an especially uncertain and challenging environ-ment for Trustee decision making. The Pensions Regulator’s recent statement to Trustees on current market conditions is both reassuring and helpful. It points out that trustees’ decisions need to be made in the long term interests of scheme members. Pension fund investment is a long term business. It also emphasises the need, in the current economic circumstances, to carefully monitor the employer’s covenant and to avoid decisions or actions which could damage that covenant. In the long run the best guarantor of a member’s pension is a sound, solvent employer. Whilst the Regulator’s emphasis upon the long term is welcome, Trustees will have to grapple with the reality that both accounting standards and the mark to market approach now taken by actuaries in valuing pension funds will ensure that the short term fluctuations in market values are reflected in company balance sheets and pension fund valuations. Even those funds which were fortunate enough to have matched all their liabilities with Swaps and Bonds before the current crises broke will not be entirely immune from its effects. Given the increased spread between Libor and Base Rate it is unlikely that the cash funds backing the swaps contracts will have been returning Libor. It is also unlikely that any “Return Seeking Assets” will have actually achieved the returns which they have been seeking. However in the scale of things these are comparatively minor problems and these funds are really in a quite fortunate position. Of much more concern, is the position of those pension funds which have retained the more traditional equity/bond asset allocation. Clearly the equity portion of their portfolio will have fallen in value very substantially. The position of the bond portfolio will depend upon the mix of sovereign and corporate bonds. Equity markets are, of course, cyclical and in the long run we would expect equity markets to rise significantly from their current low levels. However, having suffered major paper losses, Trustees may be tempted to adopt a more defensive asset strategy and move some of their equity allocation to liability matching assets such as bonds and possibly swaps. However, trustees who do this must recognise that they are “locking in” the losses from equities on that portion of their equity allocation which they transfer to bonds, which will not benefit from any future rebound in equities. Alternatively, the Trustees might decide to rebalance to their original strategic equity/bond asset allocation. Whilst this approach offers the prospect of recovering the losses on the equity portfolio in the long term, nobody knows how long the “long term” could be. It could take many years and in the meantime there could be further falls in equity markets. Also the presence of a significant equity allocation will inevitably mean that the sponsoring company will experience volatility in its balance sheet and the pension fund will experience volatility in its funding levels which, in turn, could give rise to contribution volatility. Even with this simple example there is no obviously correct answer. The approach taken will probably depend, among other things, upon the strength of the employer’s covenant, the funding position and the risk tolerance of the trustees and the employer. The important thing to remember is that however much advice the trustees take, and however carefully they follow good practice and proper procedures in taking their decision, the strategy chosen could easily turn out to be a poor one given future market conditions and if the sponsoring employer were to go into liquidation in the forthcoming recession, the consequences for members benefits could be severe. Of even more concern are those members who have retired or will retire from DC schemes in the current market conditions. Most members retiring now from schemes will buy annuities as they will need the income as soon as they retire and few have sufficiently large pension pots to enable income drawdown or other more sophisticated schemes to be viable. If the scheme’s “lifestyle” arrangements have not ensured that retiring members have largely transferred from equities to non-volatile assets before the current crisis, then these members face a grim future in retirement with annuities which will be a fraction of those that they would have been expecting even a year ago. While excellent communication is very important and the use of the open market option is vital, neither will protect unlucky members from bitter disappointment in the current environment. Unlucky and disappointed members can be tempted to mount challenges to trustees’ decisions and litigation can result. Courts and Ombudsmen, when reviewing trustee decisions, have the benefit of perfect hindsight, a luxury which Trustee Boards taking decisions now in the midst of the current market turmoil do not have. Also, however much the profession-alism of trustees has improved in recent years, it is not always possible, particularly in the DC world, to put right the consequences of past mistakes and inadequacies. Trustees also need to remember that they cannot be indemnified from scheme funds for failure to carry out their investment duties and so, if faced with a legal challenge, unless other sources of funds are available, may experience difficulty in funding an adequate defence. The best advice that I can give to other trustees in the current circumstances is to carefully follow the Codes of Practice and the advice helpfully provided by the Pensions Regulator and also to ensure that you are covered by a comprehensive trustee insurance policy so as to ensure that you have access to the help, advice and the funds which you will require if you need to defend yourself against any challenges or litigation even if such events were to occur years after you have retired as a trustee. Occupational pension funds have provided immense benefits to millions of people over the years but it is most important that those individuals who have accepted the onerous responsibility of acting as Trustees are properly protected. Peter Murray
|
 |
|
|||||||||
|
|||||||||||
