The trustee challenge

Funding Pressure

Many UK pension schemes are underfunded.  With an ageing workforce and the closure of DB schemes, the time left to achieve the funding target is decreasing, while the power of contributions to help achieve the funding target is also diminishing.  Trustees must therefore increasingly rely on achieving a return on assets that exceeds the return on liabilities in a risk-controlled manner.  How can trustees develop and implement the more ambitious investment and risk management strategies that are required to achieve the funding target?

Funding Innovation

During the last few years, many new investment options have become available to trustees: new asset classes (e.g. high yield, private equity, commodities), financial instruments (e.g. swaps and forwards to hedge risk), and investment strategies (e.g. hedge funds, index trackers) have evolved.  Many of these options enable trustees to reduce expected risk, increase expected return, or both.  But how will trustees determine if and how to take advantage of these new tools?

Timely Decision Making

Most pension schemes have static investment strategies that rely on a fixed asset allocation with periodic rebalancing rules.  This makes sense when markets are relatively stable. But financial markets have been anything but stable in the past decade.  In such environment, pro-actively taking advantage of opportunities and protecting against emerging risks becomes critical to achieving the funding target.  But how can trustees set and execute a more dynamic investment strategy?

Regulation

With every new piece of pensions legislation or regulation, trustees face an increasing compliance burden on trustees.  Maintaining risk registers, demonstrating internal control, demonstrating due diligence, and new codes on socially responsible investing and corporate governance are just some examples.  How can trustees keep abreast of these regulatory developments and ensure they comply with these regulations?

In order to meet these challenges, trustees need to put in place a governance structure that is fit-for-purpose.  Click here to learn more about governance.