Trustees have a false sense of confidence in their long-term strategy with nine out of 10 believing they are prepared for the future, but a similar proportion having had to change tack in the last year.
New research has found 92 per cent of schemes believe they are prepared for the next stage of their strategy, yet in the last 12 months 88 per cent of schemes were forced to consider a new strategy.
Barnett Waddingham, which conducted the research, says the findings suggest pension scheme strategies are not fit for purpose.
Pension trustees face a considerable challenge overseeing the running of a pension scheme, even before Covid-19, and although schemes are confident in the direction overall, there is a lack of clarity in the building blocks.
The research found 88 per cent of respondents stated they had been forced to reconsider a new strategy in the past 12 months – 50 per cent due to maturity, 40 per cent due to sponsor covenant and 40 per cent because of regulation.
The research also found 81 per cent believe the forthcoming Scheme Funding Code of Practice consultation for defined benefits (DB) funds would also lead to a change in the way they managed the scheme’s strategy.
The need for such frequent change, and in some cases for changes that should be foreseen, suggests that many existing strategies are not fit for purpose says Barnett Waddingham.
Alongside the degree of uncertainty in their current strategies, trustees also display misplaced confidence in operational challenges, the consultancy said. A schemes’ data completeness and the ability to integrate data through technology are two key areas for schemes, yet many appear to be unaware of potential issues. Many schemes are also unsure if their own technology provides sufficient information to aid strategic decision making, more than a third of schemes believe the level of investment in this area had room for improvement.
The research found 40 per cent were less than fully confident in their assessment of the employer covenant, while 31 per cent lacked confidence in the working relationship between the scheme and the sponsor.
More than a third had a sense of strategic direction but no formal plans in place, rising to 42 per cent among schemes between £21m and £499m. Even among the largest schemes with assets of more than £1bn, a quarter do not have a written strategy.
Barnett Waddingham partner and head of actuarial consulting Paul Houghton says: “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. As a scheme navigates its way through different elements, such as Covid-19 and the ever changing pensions landscape, it is essential the right options are chosen, and a fit for purpose strategy is created. 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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