In the final part of a three-part series, we explore your scheme’s operations, and how to efficiently execute your strategy.
Pin-Nee Tang, Director, and Partner at ndapt, authors this final article on the importance of managing your pension scheme as a business and delves into the aspect of scheme operations and execution.
Scheme operations
The operational expenses of a pension scheme are often overlooked. The yearly amounts may seem immaterial compared to the size of the scheme, but their present value of future operational expenses may be up to 5% of the scheme liabilities. This is not always immediately obvious. Are the scheme operations efficient and effective? Are you, as the sponsor, getting value for money?
Investments
A defined benefit scheme acts as an investment arm of the company. It can create real value within the context
of the company’s wider business.
It can also be a force for good and used to enhance or to be integral to the company’s engagement with Environmental, Social and Governance (ESG) priorities. Pension schemes as asset owners are already required by law to disclose and demonstrate their stewardship of the assets and companies are encouraged to engage with the trustees on these matters.
Execute the strategy
To execute it well, it is important to have clear communication between parties involved. In addition, the company should play its role too by providing the necessary support and resources, monitor the performance of the trustee board, identify issues and opportunities, review and refine the strategy over time.
How we’ve put this into practice
A large (over £1bn) hybrid pension scheme with a traditional trustee board structure was slow in progressing the triennial funding discussions. This was in part due to challenging technical issues and the 15-month deadline to reach agreement was looming.
ndapt was appointed to the board as Chair and took over leading the funding discussions. At the same time, the board size was shrunk and the structure simplified so as to enable more effective and speedier Trustee decisions. This lead to the Member Nominated Trustees becoming more actively involved in the discussions, enhancing the quality of discussions at board level. The triennial valuation concluded in time with a satisfactory overall funding and investment strategy put in place.
Focused on ensuring robust governance and scheme resilience, we identified and addressed certain weaknesses in other aspects of the scheme, in particular, in relation to risk management and operational efficiencies:
- One of the weaknesses was access to immediate collateral to support a highly leveraged LDI portfolio. The solution we implemented served us well because in the market turmoil following the mini-budget in September 2022, whilst many schemes struggled to post collateral quickly, we were able to do this and protect our interest rate hedge.
- Adviser scope, performance and fees had not been properly reviewed for years to ensure the Trustee is getting value for money. Following an adviser review, the adviser scope was tightened with higher service levels and fees reduced by 30%. In addition, a governance framework for assessing and managing advisers was put in place.
- The governance framework for ESG was not robust with limited challenge on the asset managers. As part of the work to comply with the Taskforce for Climate-related Financial Disclosure (TCFD), we ensured our approach was consistent with the sponsor’s and the governance framework built out to hold asset managers to greater accountability.
Having the right leaders in place can make a real difference. We believe that pension schemes should be managed as you would a business of similar size with commercial rigour whilst taking a proportionate and pragmatic approach.
Summary
You do not need to have a big budget to get big results. There is room to think smart and work smart. Have the right leadership team. Develop the right strategy. Execute it well. Engage constructively with the Trustees and your other stakeholders.
To discuss the above, or any other aspect we can help with, please get in touch by emailing pin-nee.tang@ndapt.com
