Employers and trustees can benefit from closer collaboration, including on ESG integration, to avoid reputational damage, underuse of internal resources or ‘anchoring’ on a specific view of a situation. Here is what experts recommend. 

 

Employers often see trustees as wanting too much, too soon, while trustees can view employers as undercommitted to funding the defined benefit scheme. This can lead to often tense situations, perhaps exacerbated by poor communication practices, posing a risk to the scheme and the company’s reputation. 

 

 

Pensions tends to be viewed by company boards as one of the top 10 or even top five risks, especially so where the scheme is larger than the sponsor itself, said independent trustee Allan Whalley, a former pensions director in large corporations. 

 

Speaking at a webinar organised by consultancy XPS, he argued that employers and trustees have a common problem but are approaching it from different ends of the spectrum. While companies in most cases do want to fund their pension scheme, they tend to want more time and are happy for trustees to take more risk, paying less in contributions. Trustees on the other hand prefer to fund the scheme within a shorter timeframe, holding less risk and receiving higher contributions. 

 

Given this difference in approach and expectations, communication is key. The more the employer can explain to the trustees the nature and timeframe of any issue, the better, said Whalley. “It's sharing information, being honest, being open. Companies don't like sharing forecasts etc. I think to a certain extent we need to get over that as employers, to get to a point where actually the trustees and the company work together to solve the common problem,” he said.  

  

Whalley gave examples from his time in various roles, including one where the communication between sponsor and trustees was poor and decision-making suffered as a consequence. This is often related to individuals and their views, he said. 

 

“Sometimes you need to change the people. And I don't mean that in a negative way, I mean it's part of an education. It's busting myths, it’s helping people understand the real situation, not the situation that is being painted,” he said, adding that advisers can be a factor in creating a negative picture of a situation. 

 

In this particular case, he said a shift to a collaborative approach meant the scheme moved from a deficit to a surplus, “but a lot of it required rebuilding of relationships, defining a common truth” through regular meetings. This, he argued, is “something which we do need to think more and more about as a trustee or as a chair in some cases. I have regular meetings with my CFOs... and on one of my schemes I actually meet or have a call with the pensions director on a weekly basis.” 

 

With everything that is happening in the pensions world at the moment, Whalley said it was important that there is a key person in the company who can talk to the trustees on a one-to-one basis and ensure that there is a common understanding of the issues. 

 

A key risk for either party is ‘anchoring’ in a particular view, he warned. This includes whether schemes should adopt the ‘fast track’ or the ‘bespoke’ route to compliance under the proposed new DB funding regime. Anchoring is particularly strong during valuation time, he noted, when the level of prudence needs to be decided on, but can also occur in takeover situations. 

 

 

Collaboration can avoid negative situations, agreed XPS partner Jordan Harrison, citing the 2013 example of the Church of England having some small indirect exposure to payday lender Wonga, which was highlighted in the press after the archbishop of Canterbury had criticised payday lenders for preying on the most vulnerable. “Where that crossover happens, there's a key reputational risk,” said Harrison. 

  

A further risk of not collaborating is poor use of internal resources, he argued. “If companies have got in-house teams and well developed policies where significant time and effort has already been deployed, it really makes sense for trustees to benefit from that where they can,” he argued. One of his clients is a large financial institution with a scheme that will need to report in line with the Task Force on Climate-related Financial Disclosures from October, he noted, saying that the scheme is “piggybacking on the work that their company had done in previous years". 

  

However, the most commonly observed issue, he said, was a lack of trust and confidence on the side of the trustees. While they “absolutely want to do the right thing and develop strong ESG policies”, he said trustees are often reluctant to go beyond a core compliance approach because of a concern about company views or about taking a stance that might be different to that of the sponsoring employer. 

  

“That shows how serious this disconnect can be," said Harrison, who advised employers and trustees to have an information sharing protocol. 

  

“The second thing that I've seen work really effectively is direct cross-representation,” he said, such as trustee representation on a company sustainability group, or vice versa an ESG or sustainability representative from the company who meets frequently with the trustees to discuss the key issues and share information. 

   

“The final thing that you might consider doing is some kind of ESG alignment review,” he recommended. He noted that a charity client had done a review earlier in the year, where the employer and pension fund had already adopted the same policies. 

 

"But what we found was the implementation model between the charity and the pension scheme was quite different, or there were a few distinct differences,” he said, which were resolved in the review. 

 

Allan Whalley

Adam Gillespie