Connected Research

Union policy research in the 21st century

Posts Tagged ‘Trustees

Well that worked, didn’t it?

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A belated reaction to last Friday’s decision by Alliance Boots to close its two final salary pension schemes to future accrual.

The company insists that the decision has not been made on cost grounds, but there appear to be two rationales drawn from the company’s own reported words:

1. protect the business from the effects of pension funding volatility

2. ensure the long-term sustainability of the group’s UK retirement savings schemes (which of course encompass DC provision as well as the DB schemes being closed).

With regard to (1), Boots was the first major company to opt to switch its pension fund assets entirely into bonds rather than equities – a move it undertook around ten years ago (for some techie background, see here for article by John Ralfe, written while he was Boots’s head of corporate finance and a member of its trustee investment committee). Bonds are low growth vehicles but which don’t jeopardise capital assets, and such a move was touted at the time as a solution which would lock equities-driven asset values into the asset bases of mature schemes.

Only, it doesn’t seem to have worked. One likely reason for this is the increasing growth in longevity in retirement – which, to compensate for without recourse to the scheme sponsor, is likely to require pension funds being invested in assets that are, well, a little more exciting. Indeed, The Times reports that the Boots schemes has previously switched back at least a portion of its assets into equities and property since the date of the last assessment of the scheme’s health (March 2009). Reading between the lines of the story in The Times, I’m wondering whether, despite having been in surplus last year, the forthcoming formal valuation is likely to show a deficit in the schemes, perhaps driven by a combination of increasing longevity and the impact of the Bank of England’s quantitative easing programme in lowering bond yields (and thus inflating scheme liabilities). Certainly, the purchase of equity-based assets within the last year is likely to have been a policy which, currently, will show strong returns. If there is such a deficit, it will require a recovery plan to be put in place, entailing higher expenditure from the company. This would certainly explain the rationale of ‘protecting the business from the effects of pension funding volatility’ – a somewhat differently-faceted explanation than one based on cost alone.

This is also a timely reminder in the context of Ofcom’s Pensions Review that schemes need to invest in a range of investment vehicles appropriate to their membership profile, not to concentrate in one or other type of vehicle. A mix of assets is likely to remain the most sensible investment strategy. Again, of course, it also amounts to a plea for a long-term perspective on pension fund investments- one to which, however, the private equity owners of Alliance Boots may not necessarily be sympathetic.

As regards the second explanation, the Times’s revelation that 70% of Boots employees are not members of any schemes (the DC schemes have around 5,500 members, compared to around 15,000 in the closing DB ones, out of a total UK workforce of around 75,000), in conjunction with its own reference earlier in the article to the 2012 reforms, tells its own story. Given these extremely low participation rates, auto enrolment will indeed present its own challenges as regards the total sums invested in providing employee pensions, even on the basis of use of the National Employment Savings Trust scheme, still less on the presumption of the continuation of Alliance Boots’s scheme which is likely to operate on the basis of a higher employer contribution rate than that which will fund NEST, at least in the first instance.

If the issue is one of the effects of the quantitative easing programme in inflating scheme liabilities, then today’s call by the NAPF for the issue of more long-dated and index-linked gilts is timely as regards the continued survival of other DB schemes. It’s a call that the NAPF has made before, and it remains a supportable one.

Finally, it also remains true that the best protectors of members’ interests in pension schemes continue to be a cadre of well-trained, independent and vocal member-nominated trustees firmly backed by trade union organisation. Schemes with such an independent presence on the trustee boards are likely not only to be well-run but also more accountable in terms of the decisions they make. That’s a lesson which all too often is only learned when it’s too late.

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Written by Calvin

05/02/2010 at 4:49 pm

Pensions Regulator warns on inducements

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Speaking at the National Association of Pension Funds’ annual trustee conference yesterday, David Norgrove, the chair of the Pensions Regulator, spent a large part of his time in focusing on the risk management role of trustees on the ‘worrying tactics’ of employers offering inducements to pension scheme members to leave their schemes, particularly where enhanced transfer values are offered (press release; full speech).

Norgrove referred in particular to four such tactics:

– the offer of advice paid for by the employer on the condition that members take that advice

– excessive pressure to make a decision

– misinformation, including over the future of the scheme

– putting excessive time pressure on members to make a decision, including making time-limited inducements.

Agreeing with the advice of the Financial Services Authority in such situations that:

… it is very difficult to make a direct offer financial promotion for a DB pension transfer that is fair, clear and not misleading… The FSA will start from the presumption that such transfers are not suitable,

Norgrove offered scheme trustees the Pensions Regulator’s own interpretation:

Trustees should start from the presumption that such exercises and transfers are not in member interests. If a company is willing to encourage the transfer, the company’s gain is likely to be the member’s loss.

Such a clear statement of intent is welcome and gives trustees clear guidance as to at least the initial view they should adopt, particularly in view of the ‘strong influence’ that such inducements are likely to have on scheme members, at least at the immediate, superficial level. There may indeed be some individually-specific circumstances in which a transfer out of a defined benefit scheme offers an improvement in the pensions position, but the Regulator’s belief that:

… in general it is unlikely to be in member’s interests to transfer out of a DB scheme

offers a timely perspective which is likely to be useful to those in the position of giving advice to scheme members faced with such an offer, especially at a time of continuing deficits in schemes wrought by the economic environment.

The advice is nevertheless likely to be controversial, firstly in principle with the directness of the ‘if the employer is offering it, there’s a reason for that’ line; and secondly with regard to the encouragement of trustees set out in the speech to take a more proactive line on the issue by engaging with such inducement exercises and taking the responsibility of ensuring that members are aware of the issues involved.

Hopefully, the speech is sufficient to sound the death knell for such exercises at the generic level.

Written by Calvin

11/12/2009 at 3:34 pm

Do trustees have a role in defending final salary schemes?

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TUC General Secretary Brendan Barber used his speech to yesterday’s TUC annual pension trustee conference to ask trustees to guard against employer attempts to use the recession to take a ‘slash and burn’ approach to pensions and also to join the TUC in speaking out against the ‘populist and deliberately misleading’ campaign being run against public sector pensions by some elements on the right.

Of course, trustees do have a role in protecting final salary schemes – after all, they have a statutory duty to act in the interests of scheme members – so the title of this post is a little provocative. It comes, however, from anecdotal evidence obtained at yesterday’s conference that some trustees (and even then, those at a TUC trustee conference) may not be able to stand up to employer requests for scheme closures, with some arguing that scheme closure decisions were for the sponsoring company’s HR Director to determine.

In some circumstances, a closure of a pension scheme, either to new members or for future service, may be judged to be in the interests of scheme members as a whole (including both current members and deferred and existing pensioners) where the strength of the employer covenant (a jargon phrase implying essentially the employer’s continued willingness to stand by the scheme) has been fundamentally weakened.

Nevertheless, it is clear that trustees are able to exercise their power to act in the interests of scheme members only in circumstances in which they are able to realise their formal independence from the company. This means several things:

– member-nominated trustees must form 50% of the trustees of occupational pension schemes. The legal requirement for trustee boards to be composed of one-third member nominees needs to be superseded in favour of the best models available in the private sector where one-half of trustees are member-nominated. Where member-nominated trustees are in a minority, they are both more easily dominated by the arguments of scheme sponsors as well as being more easily out-voted

-at the same time, member-nominated trustees must be plugged securely into trade union networks of advice and support so that they can fulfil their independent role more easily. Being a trustee is a challenging role in which experience of representing members, or of being located within such independent structures , provides a clear advantage in terms of how quickly trustees can be effective in that role. Continual talk in the media of how private sector defined benefit schemes are in ‘terminal decline’, in the context of the herd mentality that already characterises employers’ reaction in this regard, both increases the pressure on trustees as well as the need for them to be able to exercise their independence

– training must be provided on a continual basis, to new trustees and to existing ones alike, on what are trustees’ fiduciary duties (to act in the interests of scheme members) and how these can best be observed in these times.

Exercising trustee independence should help to protect schemes from unwarranted closure in the circumstances that Brendan Barber was addressing. In those schemes that do remain open, either to new employees or to future accrual, it is not too late to ensure that trustees can play the role that, if employers are taking advantage of the cover of the recession, they will increasingly be asked to undertake.

Written by Calvin

01/07/2009 at 4:47 pm