25th Jan 2021

Secret Diaries of a Pensions Manager. 1: Setting strategy and direction

Pension schemes that plan ahead and have a coherent journey plan, are those which have a much greater chance of controlling the path they take and reaching their end destination. What’s more, as you understand the company inside-out, you are uniquely placed to best lead a pension scheme.

However, my experience has been that while many schemes do have a business plan, in reality, it is nothing more than a convoluted calendar made up of routine tasks and therefore unlikely to help them, reach their long-term goals. Instead, an effective Pensions Manager, or a professional trustee who knows how things work from the inside, will develop strategic objectives and monitor progress against them and so measure tangible progress in reaching the end destination. Here are some tips and best practices from my years as a Pensions Manager that continue to deliver value in my role as a trustee:

First…understand the company’s business model

I appreciate that a company’s accounts may not at first glance provide the most riveting reading – but actually, they provide great insight and tell a fascinating story about the business that is supporting your scheme.

Start by analysing the competing use of the company’s free cash flow and then factoring it into defined benefit scheme funding and investment decisions. Cash flows and balance sheets are becoming stretched due to the pandemic and this could continue for some time. Companies have reacted quickly to stabilise cash flows whilst balancing future growth and operational improvements in the new normal. This means collaboration is more critical than ever and operators and stakeholders will therefore need to think differently about partnerships going forward:

  • Investors – don’t fear them. Paying a dividend is a way of showing market confidence in the future prospects of a business. Consider where the company is in its own life cycle and its resources.
  • Lenders – as debt is paid down, it shows banks and other lenders that the company has control over its capital. But what about additional financing?
  • Pension scheme – certainty of deficit payments allows a company to plan confidently for other uses of cash but reducing investment risk too soon can increase the pension scheme’s overall risk – don’t bet the farm on the company!

Key take-away: Having observed the dynamics between company and trustee, I can tell you for certain that it’s critical to form strategic relationships with the company and a deep insight into its business allowing us to learn and change together. Maintaining the attractiveness of the company for its customers, suppliers, employees, investors and lenders cannot be divorced from the pension scheme and its trustees.

Key stakeholdersshoot for the moon and even if you miss you’ll land among the stars

CEOs increasingly want CFOs to not only deliver the finances but also partner with them in shaping the company’s strategy. The CEO, CFO and CHRO form the key trinity in the company, overseeing resource allocation decisions and how the company may look in the future. Boardroom oversight and compliance should go hand-in-hand with strategic management.

Why does this matter I hear you ask? It matters because it’s important to maintain an effective relationship with key corporate stakeholders, including gaining support for the strategy on how the pension scheme is run.

An effective trustee will stay in close contact with company management teams, surface all the issues they will want to understand (including corporate accounting and tax consequences) and manage tensions between helping an employer survive and running a sustainable pension scheme. It’s important to navigate, challenge and honour that key trinity and the issues they face. It’s also a good idea to introduce a formal review programme, which allows for trustees and the company to provide feedback on the experience of working with each other.

Key take-away: trustees who can see the world through the lens of the company will have the best chance of achieving their desired outcome.

Setting strategic priorities

As we emerge from the pandemic, setting a long-term funding target is a key focus for trustees and sponsors in 2021. It is crucial to appreciate that the current funding basis might only be a milestone along the scheme’s journey plan. If changes are necessary, the existing strategy may not be fit for purpose. Companies need certainty and so working with the company to build a framework that is adaptable will be key to success.

Historically, companies have been forced down the insurance route but now many can’t simply afford to do so. Full insurance comes at a cost – it’s not called a premium for nothing and not so long ago defined contribution members were getting a raw deal by being forced down the insurance route. However, today, financial markets and innovation have given birth to a variety of new intermediate choices including the emergence of new consolidators. This is very welcome 

Key take-away: there are more options on the table and so the obvious route may not be the best route. Trustees who show leadership and explore all the options make the best choices.

Develop a clear view

Pension decision-makers should embrace the challenges that face them and not fear being the positive disruptor.

Corporate executives, Pensions Managers and trustees face a clamour of suggestions on the next steps they should take and too much choice can be a real problem. Don’t just listen to those who shout the loudest. The best leaders are those who understand the dynamics and challenges and have a clear view of where they are going – they focus relentlessly on executing it while also being confident to fine-tune the strategy as resources change.

Key take-away: believe in yourself and the end goal

Speak to us about how your business can work with Stuart and the team at 20-20 Trustees.

More to follow in 2021:

  • Industrial relations and Trade Union interactions
  • Managing advisers
  • Operations
  • Working with the Pensions Manager