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

“One of my key bits of advice, at such times, is to look down the list of things you would like in return from the trustees,” says Hurd. If the company is putting up contingent securities, for example, which obviously strengthens the scheme covenant, then if there are things in the scheme trust deeds, or old (and potentially worrisome) ‘agreements in principle’ between the company and the scheme, now is the time to address these. The trustees will be much more amenable to giving the company something back if they feel they are securing something for the scheme.

Dave Robertson, worldwide partner in Mercer’s financial strategy group, agrees. “If you’re being pressured into providing a large cheque, try to use it as leverage to get the trustees to make changes that they would not otherwise be minded to make,” he says.

Of course, in theory trustees can simply tell the FD to take a hike, since it is likely that the contribution is not exactly being made voluntarily by the company, but is part of a general plan to move towards a fully-funded position. However, Robertson points out that trustee bodies would far rather get contributions without their case having to find its way to the Pensions Regulator.

“If the company is being reasonable, there is no certainty that the regulator would side with the trustees. They may be able to chase the money with or without the company being willing to hand it over, but there is good mileage for the trustee body in accepting constructive discussion as a reasonable price to achieve a more certain outcome,” he says.

The list of things FDs may want to change varies from the drastic, such as moving to a full buyout, to various de-risking strategies covered elsewhere in this report, to what might look like mere housekeeping issues, such as removing a few restrictive elements in the trust deeds. However, old trust clauses can sometimes turn out to have a sting in the tail disproportionate to how they might have been viewed previously.

Robertson cites the example of a scheme whose trust deeds, having been written in a more optimistic era, include a provision for pensions increases to be provided to members whenever the scheme is fully funded. That is not a proposal that any sensible FD would want to entertain now, since more benefits equals more liability just when they are doing everything they possibly can to plug that hole. Trustees know this well enough, of course.

If the FD, apropos of nothing at all, simply asked the trustee board to eliminate the clause, they would ask the FD what they would do in return. Having this conversation with that large cheque in one hand is the right moment and broaching it on any other day of the week is not the right moment.

Importantly, getting the trustees to drop this provision can have a significant impact on the amount the company needs to reserve for pensions, thus freeing up real cash for actual, revenue-generating projects.

One of the critical things FDs should be doing, either when they have moments of leverage with the trustees, or simply through the fact that they have a good working understanding with the trustee body, is agreeing in advance what the key trigger points will be for a range of actions regarding the scheme. The aim here is to clear the decks, as it were, and get the trustees on side so that they can make decisions rapidly when market conditions are right.

Trigger point
Robertson gives the following example. “If you are in a market where interest rate swaps are too pricey, trustees should be thinking about the trigger pricing levels that would enable them to do a swap. So when the market delivers those numbers the trustee body is ready to move and can take some risk out of the scheme at a price that they know makes sense.”

Right now, there is a shortage of counterparties for interest rate swaps, but if the FD works with the trustee board, they can clarify in advance that a real rate of, say, 1.35% would create a satisfactory position to cover both the cost of the swap and make the swap viable. The point when interest rates look to be reaching 1.35%, in other words, becomes an action trigger agreed by both the FD and the trustee body, with no need for further discussion.

That, at least, is the theory. However, Dave Robbins, pensions partner at Deloitte, says that admirable as this strategy sounds in theory, it is fiendishly hard to make work in the real world. “Setting trigger points for actions and agreeing it in advance with the trustee body is obviously a good thing. But what tends to happen once you get a committee sitting down to agree to action the pre-agreed trigger is yet more debate.

Someone is bound to say, “But if 1.35% is good, why don’t we wait till 1.5%?” Or someone says, “OK, the FTSE has hit 5,500, but why don’t we leave it for six months and see if it hits 6,000 before we act?” Once you get committees starting to talk, the agreement to act unravels fairly quickly,” he says.

However, experience is supposed to be a great teacher, and both advisers and FDs can now point out concrete examples of missed opportunities to trustee bodies. Trustees are not wilful or stupid. They are as capable of disciplined action as anyone else, once the proper case has been made. So it might be that with pre-agreed actions, FDs will find themselves in a better position to take advantage of market movements and take some risk out of their pension scheme without missing the boat entirely.