Challenges Facing Pension Fund Trustees

PRESENTATION
April 2009

A. Introduction

Changes in The Industry in Recent Years

1. Pension Reform published 11 June 2003
   - Solvent companies to buy-out deficits in wind-up
   - Funding obligation became compulsory for sponsors
   
2. Pension Act 2004
   - Power to Trustees to collect on liabilities
   (e.g. Tesco transfer £500m property contingent rights to Trustees)
   - Power to Pensions Regulator to ensure best practice


3. Shift from Defined Benefit (DB) to Defined Contribution (DC)
   - Cost of risk-free pension, beyond the means of sponsors
   - The Pension Protection Scheme (2006)
   - A centralised compulsory Insurance Scheme as a result of Mergers, takeovers, etc


4. The Pensions Act 2008
   - Employers: New duties to (automatic enrolement/3% min contribution)
   - Regulator: New objectives to maximise compliance
   
5. Current Financial Crisis
   - Increase pressure on funding and risk of default/insolvency
   - Emphasis on the management of risk using LDI and ALM
   

B. Challenges Facing Trustees

The Current Challenges for Trustees

1. Falling in the Value of Pension Fund Assets
2. Breach of Covenants by Sponsors
3. Solvency Risk affecting DB funding
4. Meeting Investment Objectives
5. Fear of Personal Liability
6. Longevity Risk

Challenges Facing Trustees

1. Fall in the Value of Pension Fund Assets
   - Drawdown in equity market (worldwide) 60-80% decline over 12 months and credit write downs.
   - Aggregate shortfall breach £253bn in March 2009 (FT Apr 09)
2. Breach of Covenants affecting funding
   - Increase in the cost of debt of Companies.
   - Falling revenues and drying up on credit markets
   - Management time on managing risk and protecting cash flows
   
3. Company Solvency Risk affecting DB funding
   - Fall in company revenues and assets from write-down
   - Decrease in solvency ratio and call on Pension Protection Fund
   - 95% Solvency Ratio for UK Pension Funds (Hewitt Associates)
   
4. Meeting Investment Objectives
   - Use of Liability Driven Investments or Asset Liability Management techniques
   - Increase use of Alternative Assets
   
5. Fear of Personal Liability Affecting Membership
   - Increase use of professionals for investment advice
   - Need for education and guidance on risk management
   - The extent of hedge fund exposure to toxic assets (FoF)
   
6. Longevity Risk
   - Decrease in mortality (no. of over 65s double in 10 yrs to 2007)
   - Fall in membership
   - Funding future pensions

C. Future Challenges

1. Legislation and regulations if crisis persists
2. Increased responsibility/training and education
3. New investment products, e.g. CTAs/derivatives/options/innovative strategies/overlays
4. New risk management techniques
5. Sharing of pension risk.