Is There an Ostrich in Your Boardroom?
Only an ostrich can have failed to notice a rise in the importance of company pension schemes to corporate activity and the increased role of pension scheme trustees. Indeed the black hole in some schemes can be as much as the company value.
(PRWEB) July 12, 2006
You know how it is. We’ve all endured those business meetings when something’s clearly wrong, everybody knows but no-one says anything.
It’s as if there’s an elephant in the room but everyone pretends they can’t see it. Well there’s another African species making regular appearances in board rooms these days – the ostrich.
Notorious for burying their heads in the sand when danger approaches, they refuse to face their problems, hoping they’ll simply go away. And a perennial problem for the boardroom ostrich these days – pensions.
Only an ostrich can have failed to notice a rise in the importance of company pension schemes to corporate activity and the increased role of pension scheme trustees. Indeed the black hole in some schemes can be as much as the company value.
Given the provisions of the Pensions Act 2004 and the risk based approach adopted by the new Pensions Regulator, I can only see the level of trustees’ corporate involvement increasing, so any degree of optimism that it can be ignored as a passing issue is clearly misplaced.
Our advice to clients – and others – is to get pension schemes health checked to determine whether they are meeting all the requirements, whether there is a deficit which needs addressing and to ensure both employer and employee understand the value of what is being provided.
In simple terms, schemes have only two sources of revenue. The choices for trustees are seeking higher contributions from scheme sponsors, members - or both – or relying on achieving significant out-performance from their investment portfolio.
Of course this implies a relatively high risk investment strategy – probably heavily reliant on equities. As we all know, these don’t always work out which could well leave trustees looking to even higher contributions from sponsors and members. The new actuarial orthodoxy is that pension liabilities are best matched by bond like investments. But the lower returns these are likely to deliver will again result in higher contributions from elsewhere.
In reality, the majority of schemes will opt for a middle course, somewhere between higher contributions and an aggressive investment strategy. However, despite the welcome investment returns achieved over the past couple of years, the solvency position of many schemes has not improved. Many remain in considerable deficit, due to the fall in bond yields and the fact that people are simply living longer and drawing more pension.
So what about increased contributions? Scheme sponsors have witnessed significant rises in recent years. Many will seek to control further rises, especially where a direct impact on the trading position of the business would result.
Yet as employers resist significant contribution increases and seek to pursue higher investment returns, the trustees often prefer an opposite course – resulting in tensions and very robust negotiations.
Imagine the problems posed for directors performing both roles. Demonstrating separation of the trustee and company roles proves almost impossible, allowing claims from scheme members that trustees have not acted in their best interests. Even where trustees have identified and managed conflicts of interest and acted entirely properly, this may not be the perception the members hold.
Trustees may also wish to ensure they are dealt with in the same way as other creditors, such as the banks and that their debt is paid off over a similar period as any outstanding loans. This has the potential to see repayments of deficits over shorter periods than previously and by implication, by significantly higher deficiency contributions. Indeed it has been suggested that trustees may wish to seek to restrict the payment of dividends until the pension deficit is addressed.
Whilst this new reality will be unwelcome in many boardrooms and probably in some trustee boards also, it cannot be “swept under the carpet,” particularly against a backdrop of the introduction of scheme specific funding. There could be some difficult meetings ahead where deficit issues are addressed.
There is no longer any room for ostriches on either side as we all know which part of our anatomy is exposed when we bury our heads in the sand.
Kevin Walker and his team at RMT FM can be contacted on 0191 256 9600 and the company’s website is at www. rmtfm. co. uk
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