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DB trustees face dilemma over deficits – S&P

UK – The trustees of defined benefit schemes should have ‘appropriate tools’ to help them balance cutting deficits and keeping costs to the sponsor within limits, a conference has been told.

Alex Weiland, director of pension services at rating agency Standard & Poor’s told the Pensions Management Institute event that trustees face a dilemma when considering the broader interest of the schemes and their members.

Weiland said that un-funded DB liabilities were debt-like, but there were no fixed terms and pension schemes often were not able to enforce debt repayment.

In the course of his presentation – “How strong is your sponsor?” - he said for small and medium enterprises debt recovery depended on the quality of collateral, while large corporations considered seniority as a key driver.

Negotiating contribution rates, trustees must decide whether to leave additional funding with the sponsor to reduce the probability of default, or whether it should be paid as an additional contribution to the scheme to reduce the consequences of default.

Trustees’ dilemma is that, if they obtain additional funding from the sponsor, they increase funds available for the benefit of members.

This, at the same time, may weaken the sponsor’s financial strength and could also increase the risk that the sponsor becomes insolvent, putting active members out of their jobs, as well as penalising pensioners.

“Either way, the trustees could be open to criticism subsequently, with the benefit of hindsight,” he stated.

“It may be difficult to determine that there is a ‘right’ decision, but what is important is whether the process the trustees went through to reach their decision was diligent and whether they had sufficient information and the right tools to make a properly informed decision.”

The rating agency has developed the Defined Benefit Assessment Service (DBAS), to help trustees and sponsors assess the impact that the sponsor’s credit strength can have on decisions about funding and investment strategy.
DBAS Assesses credit risk on the financial strength of the sponsor, scheme solvency, contribution regime and scheme maturity.

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