There is a risk that sponsors who aren’t proactively working with their trustees now could be tied into a long-term pensions strategy that demands higher cash funding and which won’t fit wider business objectives over time. If the sponsor isn’t involved in these conversations now, this could store up problems for the future e.g. inefficient use of resources unhelpful accounting impacts of trustee-led initiatives and road blocks for future corporate activity (eg dividends and future refinancing).
According to LCP the key components of a successful strategy agreed between scheme sponsor and trustee are:
• Clarity on the scheme’s ultimate destination – is it heading to buyout, run-off or another transaction-based target?
• Clearly defined timescales within which this target should be achieved
• Well-defined approach to investment de-risking
• Managing liability side risks, such as member options
• Effective processes to identify and respond to risks and opportunities along the way (with early notification for where sponsor input and trustee engagement is required);
• Efficient scheme governance, including managing advisory and investment costs;
• Management of regulatory requirements and early warning of events which may fall in scope of the new Pensions Regulator powers
Laura Amin, Principal in LCP’s Corporate team, commented: “As a result of the Pension Schemes Act and the TPR new powers, trustees and sponsors need to work closely together to ensure there is a sustainable journey plan for their scheme. Scheme sponsors really need to seize the day and proactively engage with their trustees to ensure that the scheme’s plan is aligned with the wider business needs. For instance, sponsors taking a back seat now may find the Trustees setting a strategy resulting in higher cash funding requirements over time and potential road blocks for future corporate activity.
“It isn’t just to minimise risk, there are opportunities to be had in trustees and sponsors working hand in hand. Sponsors being proactive and engaging with the Trustees early can help set the pensions strategy and ensure alignment with the wider corporate strategy. There is the potential in most cases for real win-win outcomes.”
You can read more about LCP’s approach to pension strategy for sponsors here
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