Special Report - Pensions Risk Management: Snooze you lose - convincing trustees to take the risk out of pensions

There can be very few finance directors at FTSE companies who feel relaxed and at ease with their company’s final salary pension scheme. The constant media headlines around defined benefit scheme closures, buyouts and benefit cutbacks highlight the continued struggle to get out from under the crushing burden of what has become a seemingly unstoppable drain on the company’s resources.

The final salary scheme is not a problem FDs can simply walk up to and grab by the ears given their distance from the levers of power ­ held by the trustees ­ putting them in the unenviable position of having to proceed with tact and charm on matters pertaining to their own bottom line, since their trustee body is not obliged to listen. And even if they do listen, they are certainly not obliged to act on the advice being given.

Not exactly a happy position, but, as Kevin Wesbroom, UK lead for global risk services at pensions adviser Hewitt observes, there are ways an FD can influence the trustee board if they can engineer the relationship correctly. “Companies get the duties of FDs and trustees terribly wrong and that is the first thing that needs to be straightened out,” says Wesbroom. “For example, if a finance director decides that he or she wants to go for a buyout immediately, the most likely response from the trustees will be: ‘Sounds interesting ­ give us all the paperwork on the proposal and we’ll review it at our next meeting in three months’ time, after which we’ll give it to our actuaries and see what they advise’.”

What Wesbroom is pointing to is the startling difference between the speed with which companies make decisions and the kind of decision timeframe that trustee boards typically feel happy with.

Slow response
Marcus Hurd, lead principal for Aon Consulting’s corporate advice team, says the ponderous way in which pension fund trustee boards tend to react has caused companies to miss out on some of the best opportunities to de-risk their final salary schemes over the past few years.

Last year in particular there were some very good opportunities to take risk out of the scheme at very attractive price levels. However, while a number of FDs might have seen the opportunity, their trustee boards simply couldn’t get their act together quickly enough.

This is not through any antagonism between the FD and the trustee board ­ quite the contrary. As Hurd puts it, “I have not known a trustee board yet which did not welcome the FD taking an active interest in the scheme.” Trustees realise the company and the FD must live with the consequences of everything the trustee board does. But trustees also take seriously the need to deliberate and to take full and detailed advice before they act, since the decisions they make affect their members’ future and the quality of their old age very directly.

“What this means is that, in our experience, trustee bodies take months to make even the most basic decisions and they can easily take up to 12 months to make the more complex decisions, such as whether or not to enter into an interest rate or an inflation swap,” he says.

Why does this matter? It matters because the conditions that favour particular courses of action fall into place for relatively brief periods of time. Hurd cites the fact that, for a few months in 2008, it was possible for schemes to insure pensioner liabilities at below the cost that many schemes were holding for those members. “Schemes that could move rapidly took advantage of this pricing anomaly and took a substantial amount of volatility off the books,” he says.

Most schemes, however, couldn’t move fast enough and the moment came and went. The schemes that were able to take advantage could do so because the company and the trustee board had already put considerable time and effort into improving the trustee board decision-making process.

Increase your influence
The FD must look to strengthen their influence with the trustee board. Wesbroom and Hurd agree that the best opportunity FDs have to pressure trustees comes when they are about to give the trustee board a cheque or when they are going to put assets in one shape or form into the scheme.