Trustees of smaller-sized defined benefit pension schemes should make decisions on “good enough” information, instead of wasting time not doing anything material, PiRho has advised.

Speaking at the Practical solutions for the smaller defined benefit schemes seminar, PiRho Investment Consulting director Phil Irvine warned that schemes can waste a lot of time and money getting liabilities exactly right.

“In this volatile investment market, an advantage smaller sized schemes have is their ability to make speedier decisions, as they tend to have a less committee/bureaucratic approach to decision making.

“Therefore they should not get bogged down in detail or ‘over-complicate’, but instead focus on decisions that add the most value, such as strategy issues instead of spending too much time on manager selection,” he explained.

Smaller-sized schemes should also pay attention to market volatility, as the ‘path of returns’ does matter, not just the end point. “Speedy decisions add value”, Irvine added.

A recommendation for portfolio management by First Actuarial was for smaller sized DB schemes to use a ‘build up method’ for assuming equity portfolio returns instead of the standard ‘gilts plus equity risk premium (ERP)’ approach.

First Actuarial founder Keith Williams advised that schemes calculate projected equity returns by adding together the net dividend yield with the RPI/CPI assumption and real dividend growth, minus investment expenses, to achieve the ‘best estimate’.

This would provide a “more stable, smoother result” in the current market of low gilt yields, which are causing some schemes to be in ganger of hitting The Pension Regulator (TPR)’s ‘problem trigger’ of requiring more than 10 years to remove their pension scheme deficit.

However, Williams warned that TPR seems ‘wedded’ to the gilts plus ERP model, but a statement from the regulator regarding scheme funding is expected in April.

Also speaking at the seminar, Thomas Miller Investment (TMI) investment strategist Abi Oladimeji warned that over the medium-term investment horizon low interest rates will not continue and governments’ debts will put pressure on interest rates.

"While the prevailing weak economic backdrop may ensure that yields remain low in the short term, government bond valuations look unattractive from a medium term perspective and government bonds are likely to deliver poor risk-adjusted returns over that horizon," he added.

Sole trusteeship was another consideration for small-sized schemes highlighted at the event. Once schemes begin to close and become a company “burden” instead of an employee incentive, it may no longer be practical to have a full trustee board, LawDeb Pension Trustees Michael Chatterton advised.

The Practical solutions for the smaller defined benefit schemes seminar is the first in a series hosted by TMI, OPDU, First Acturial, LawDeb Pension Trustees and PiRho. These companies have formed an agreement to collectively provide tailored solutions to meet the unique issues facing smaller-sized defined benefit schemes.

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