88% of DB schemes forced to consider new strategy over past year

The majority (88 per cent) of defined benefit (DB) pension schemes were forced to consider a new strategy in the last 12 months, despite 92 per cent of schemes stating that they are prepared for the next stage of their strategy, research from Barnett Waddingham has shown.

The survey has sparked concerns that trustee confidence may be misplaced in scheme strategies that are not fit for purpose, with the number of schemes forced to consider a new strategy increasing to 96 per cent for those with assets over £500m.

Of those schemes who had been forced to consider a new strategy, 50 per cent were prompted by maturity levels, 40 per cent had done so due to sponsor covenant, whilst 40 per cent cited regulation.

In addition to this, over three-quarters (81 per cent) of respondents stated that they expect the upcoming Scheme Funding Code of Practice consultation for defined benefit (DB) schemes to lead to a change in the way they manage the scheme’s strategy in future.

Considering this, Barnet Waddingham warned that the need for such frequent change, and in some cases for changes that should be foreseen, suggested that many existing strategies were not fit for purpose.

It also argued that respondents lack of certainty was further highlighted when considering their confidence in specific elements of their scheme.

For instance, it found that 42 per cent were less than fully confidence in the skills of their investment adviser, 48 per cent were not fully confident in the expertise of other advisers, and over half (54 per cent) were not fully confident in the expertise of trustees.

It emphasised that despite being a key relationship, nearly a third (31 per cent) of pension schemes lacked confidence in the working relationship between scheme and sponsor.

Furthermore, 40 per cent of respondents were less than fully confident in their assessment of employer covenant and nearly half (47 per cent) believe only have visibility of the covenant for five years or less.

In addition to those who have changed strategy, the report also found that more than a third (36 per cent) of schemes had a sense of direction but no formal plans in place, increasing to 42 per cent amongst schemes with assets between £21m and £499m.

Whilst a lower proportion, the report noted that even amongst the largest schemes, with assets of more than £1bn, almost a quarter (24 per cent) had no written strategy.

Commenting on the findings, Barnett Waddingham partner and head of actuarial consulting, Paul Houghton, stated: “A DB scheme is very much like a piece of machinery with many moving parts, these moving parts need to be maintained by experts in order to keep moving and avoid the possibility of breaking down.

“There is a worrying amount of, what could be perceived as, false confidence from trustees administering their machine.

“Although confidence levels appear to be high in the overall strategy there are a number of anomalies when we begin to drill down into the minutiae of the findings.

“This survey’s intention was not to separate schemes by confidence level, but to highlight the moving parts that need to be tightened.

“Schemes need a well-defined strategy, some already do, and some only think they do but in reality the majority need to be honest – they need help."

Houghton explained that as a scheme navigates its way through different elements, such as Covid-19, it is "essential" that the right options are chosen, and a fit for purpose strategy created.

He continued: “This does not need to be immutable, but those stakeholders involved need to understand the options chosen.

“All schemes face numerous challenges. However, we were surpassed by some of the issues causing trustees to change strategy, like scheme maturity, as they can easily be foreseen in advance using the correct technology and data.

“The weaknesses we have highlighted represent key components within every scheme, which are an integral part of running a well-oiled machine.

“These areas must be identified and fixed before trustees can be confident in the strategy they have created, as a whole not just some components.

“Reviewing these areas will allow strategies to measure up to expectations and remain fit for purpose so they can confidently navigate through their long-term journey.”

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