Every year, Pensions Insight  conducts a survey among independent trustees, to examine the biggest challenges facing the industry. Here’s what we learnt.

Professional trustees involved with defined benefit plans are concerned with the financial viability of those schemes. The persistence of low real yields and the need to improve funding levels were among their top three concerns.

Stormy times ahead for DB schemes, say independent trustees

Source: Flickr

In investment terms, respondents expect schemes to adopt LDI strategies (60%), fiduciary management (39%) and income-focused strategies (41%) to address these challenges.

However, with over a quarter of independent trustees (27%) citing sponsor covenant as their clients’ biggest challenge, investment factors are not the only issue.

Respondents were divided over whether consolidation might be the answer, with a very slight majority (55%) saying that smaller schemes should be encouraged to consolidate. However, among trustees that only work with DB schemes, this figure was lower (47%).

The controversial issue of whether companies should be able to offload or reduce their pension obligations if the sponsor company is struggling divided our audience exactly in half, with 50% saying this should be an option for schemes, and the other half disagreeing.

Recent LGPS pooling gives some precedent for consolidation, and nearly half (45%) of respondents said that they this was a positive move, although 47% had no view at all.

The message is much clearer when it comes to buyout, with 69% saying that they believe most DB schemes are now targeting this as an end-point for their scheme over the medium to long term.

DC scheme priorities

For DC schemes, member engagement is the biggest concern.

With auto-enrolment minimums on the increase and freedom and choice placing more responsibility on individuals , perhaps that is to be expected.

The survey showed that many DC schemes are planning changes to their default funds to reflect the 2015 reforms. Adapting the de-risking asset mix (44%), incorporating drawdown (41%) and changing the growth asset mix (30%) were the three most common strategies that DC trustees expected their plans to adopt.  

DC schemes are far more worried about good governance than their DB counterparts

More significant structural changes, such as introducing alternatives (15%) and investing in target date funds (13%), were far less popular. This suggests that DC scheme trustees are tending towards amending existing default funds to meet future needs, rather than introducing completely new structures.

The challenges of liquidity, daily pricing and access from fund platforms, as well as scheme asset size, are still likely to limit the use of alternatives in DC in the immediate future.

DC trustees are more concerned about governance than ther DB counterparts. Only 4% of trustees listed this as the most significant concern for their DB scheme compared to 20% of those who work with a DC plan.

This may be driven by increased pressure from the Pensions Regulator as well as the growing significance of DC in the workplace.

MNTs

We also asked our independent trustees to identify the biggest pressures facing their member-nominated counterparts.

Overwhelmingly, they identified increasing regulatory demands as the biggest challenge. Hardly surprising, given the wealth of regulatory change in 2015, general political instability caused by Brexit and the fallout from pensions events such as the collapse of BHS.

However, while the regulatory burden is cause for concern, the belief that lay trustees have insufficient knowledge and experience is higher than ever.

Table 1 - The Biggest Challenges facing Lay Trustees
Issue 2017 (%ages) 2016 (%ages) 2015 (%ages)

Having enough time to fulfil their role

14

37.5

25

Insufficient knowledge and experience

39

29

36

Keeping abreast of increasing regulatory demands

47

30.5

39

Other

0

3

0

Improving standards

We asked respondents what single thing the schemes they worked with could do better.  Unsurprisingly, the most common response by far was ‘make decisions more quickly’ (35%), followed by ‘improve investment knowledge’ (17%). 

However, amongst trustees who only worked with DB schemes ‘Improve collaboration with the corporate sponsor’ (25%) and ‘Become more independent of the corporate sponsor’ (also 25%) naturally moved up the agenda.

For the first time this year, we also included an option related to ESG credentials, but this did not make it to the top of the list of priorities for any of our respondents. 

Criteria201720162015
Table 3 - What single thing could the schemes that you work with do better? 

Make decisions more quickly

35

27

29

Improve governance

10

18

10

Improve investment knowledge

17

18

27

Pay less attention to the investment consultant’s view

1

0

2

Become more independent of the corporate sponsor

13

12

2

Improve collaboration with the corporate sponsor

23

23

29

Improve ESG credentials

0

N/A

N/A

In a nutshell

  • Professional trustees of DC schemes are focused on member engagement above all else, with default fund changes and improving scheme governance also high on the list. 
  • DB schemes are more concerned with the need to focus on the sponsor covenant and the challenging investment environment.  For these schemes, LDI and income-focused strategies are likely to play a major part in 2018. 
  • Both DB and DC independent trustees believe that the boards they work with are too slow when it comes to making decisions.

To Read the full report click here