Pension trustees ‘need skills to cope with recession’
UK - Trustees need to improve their understanding of discount rates, assumptions and their sponsor's finances to keep their schemes funded during the recession, according to consultants and actuaries group Punter Southall.
Punter Southall's first scheme funding survey found despite 60% of trustees receiving frequent reports from a range of actuarial sources, fewer than half recognised how the recession is actually affecting their scheme's funding level.
"Trustees need to acquire greater skills in understanding their sponsor's financial position in the current economic climate," said Jane Beverley, head of research at the firm.
"This coupled with better negotiating skills will help them draft a better covenant with the right trigger points as the recession bites," she added.
Interestingly, she warned it was not only trustees who needed to improve their knowledge, and argued: "It is essential that the sponsors themselves understand how the scheme impacts their finances and they need to develop the skills to understand the questions trustees are likely to ask."
Beverley claimed trustees are also not fully equipped to understand how and when to review the assumptions they use.
"The effects of deflation should now be factored in. But the vast majority of trustees are only likely to know how to apply inflation assumptions. This is an area many will need further learning," she explained.
Similarly, setting the discount rate is likely to throw up new questions which trustees may not know how to answer.
"With equities at such a low point, many will need to evaluate their equity risk premium and decide how much they should rely on equity outperformance over bonds, for instance, when they set their discount rates, "argued Beverley.
"Although their knowledge and understanding has greatly improved in the past years, the recession has further highlighted trustees' shortcomings. Another area that trustees should consider is how well they monitor their scheme.
"Too many may feel they have the right formula as they will claim they have set funding levels adequately in the past. But these are exceptional times, and a tick-box culture is not sufficient. Trustees must learn how to spot changes to their sponsors fortunes and proactively adapt their systems and processes constantly to ensure the right trigger points alert them to danger," she added.
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