In our ongoing series on getting to grips with governance, we have already provided our insight into scheme governance issues which Trustees should consider, covering Trustee effectiveness, administration and covenant and funding. This week, we are looking at investments.
COVID-19 had a devastating effect on some of the asset values in growth portfolios of pension scheme schemes, for instance between January and March 2020 the FTSE All-Share index fell by 35%. However, I was surprised to see at the time of writing this article, although the FTSE All-Share index has yet to recover to pre lockdown levels, the FTSE All-World Index, the S&P International Corporate Bond index and the iBoxx £ Non-Gilts index, are all showing positive returns since the start of the year. This appears to be good news, but for pension schemes, it is unclear what effects there will be on particular investments values and liquidity in the medium term.
The aim of any pension scheme is to provide members with the benefits they are due under the Trust Deed & Rules and therefore, Trustees have to consider the medium and long term nature of their scheme. The Pensions Regulator (TPR) introduced Integrated Risk Management (IRM) in 2014 and defined this as “an approach that you can use to identify, manage and monitor risks that can affect the funding objectives for your defined benefit pension scheme”.
As many people are aware, this mainly covers the risks associated with covenant, funding and investments taken individually and as a whole. In our experience, the level of IRM varies significantly from scheme to scheme, which has meant a wide range of reactions to the changes to the covenant, funding and investment values since COVID-19 was first identified.
What is clear from our analysis on our clients is that the de-risking strategies over the past ten years, have helped to weather the sudden change in investment values and liabilities of pension schemes, which in turn has eased some of the pressure on their employers. In fact, for a small number of schemes that were already in surplus, the increase in the liability matching assets outweighed the increase in funding levels. Whether that was because of incorrect hedging or it was planned is debatable, but one thing is certain, these schemes are able to secure the benefits of their members through a buy-out much sooner.
It will be interesting to see what happens with investment strategies over the next year for instance, will there be a change to the risk appetite of Trustees on the investment strategy of the scheme? Will there be opportunities available in these growth portfolios, or will we see a change to investment triggers to continue to de-risk the scheme investments?
Time will only tell, but it is important that any decisions made by Trustees are thoroughly considered and documented, in consideration of TPR publications over the last quarter.
COVID-19 may have affected the sponsor covenant, funding levels and investments values in many different ways, which could hinder a pension scheme providing to its members. Therefore, Trustees need to ensure that any decisions made are clearly documented, to show why these decisions were made and why they considered these to be the best interest of the members of the scheme at that time.
Our next instalment of getting to grips with governance will be considering ‘what happens next’ as the majority of the economy is now ‘open for business’, but if you wish to discuss anything covered in this article or previous ones, then please contact us.
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