Spence & Partners latest blog for Pension Funds Online –
There are many terms used in the industry to describe the process whereby trustees and scheme sponsors agree a funding target and plot the path between where they are now and the attainment of that funding level – some call it flight paths, others journey plans or route maps.
Unless you spent the Christmas break in a remote location with no access to the pensions press, you will have also heard that the Regulator has issued a consultation document regarding its revised code of practice for funding defined benefit (DB) schemes.
The approach the Regulator sets out in this document is one which, arguably, trustees should already be taking – i.e. obtaining a real understanding of the sponsor’s covenant, the risks it is exposed to and its growth plans, and then using that information to determine a reasonable pace of funding towards an appropriate target. Any such plan should respond and adapt as economic conditions change, or as the circumstances of the sponsoring employer are altered.
Whilst the Regulator’s consultation plan does not represent a fundamental change in approach, it does require trustees to up their game – both in the level of understanding they have of the employer covenant and also in building a funding and investment plan, which has the ability to react as conditions change.
Perhaps we are seeing a move away from flight paths and, instead, plotting a course in much the same way as one would do when setting off on a transatlantic voyage by boat. At the start of the journey, a long way from the eventual destination, one would set a course, which was expected to take the boat in broadly the right direction, taking into account expected sea conditions, tides and wind direction. There would be a need to adjust from time to time as tides, wind and currents took you off course but, again, these would be less regular, quite fundamental changes. As you got closer to your destination, the captain would undertake more careful navigation, ensuring that small adjustments were made regularly to steer the boat safely and precisely into harbour.
A funding plan can be looked at in much the same way – there is unlikely to be a straight line from where you are now to where you want to end up and conditions will push you off course from time to time. At the start of the process, it is important to be clear about where you want to go, understand the variables which might push you off course and agree the way in which any adjustments should be made as a result of changes in conditions. As you get nearer to your funding target, more regular changes may need to be made to steer towards that eventual goal.
Either way, whether you are close to achieving your funding aims or whether you still have an ocean ahead of you to navigate, carrying out an actuarial valuation once every three years, setting your investment and contribution plan and then not looking at whether these remain appropriate until the next valuation date is akin to setting a course, going below deck and not resurfacing for several weeks – you may still be on course, but it is pretty unlikely. A properly responsive funding and investment plan requires advisors to up their game and provide trustees with ready access to the metrics they need to monitor progress and make adjustments as required, much more often than once every three years.