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
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
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.
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,”
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.
“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
“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.
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.
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