Trustees are responsible for paying members the benefits to which they are entitled. They cannot do this without sufficient funds. It is prudent (and a legal requirement) to set funds aside for this purpose rather than wait until benefits need to be paid. Trustees need to monitor whether what has been set aside is sufficient.

This is a difficult task. A scheme could potentially still be making payments in tens of years’ time to cover benefits that have already been earned. Because so many things can affect the scheme in the future, it is not possible to know with any certainty the level of funds needed now to make benefit payments in the future.

When checking whether they expect to be able to provide benefits at the right level, trustees need to consider three key components - investment matters, funding matters and the strength of the employer covenant. A trustee meeting is the perfect opportunity to review each of these in more detail.

Investment performance and strategy

Trustees are responsible for millions and sometimes billions of pounds of scheme funds. Their investment decisions can have a major impact on funds, security of benefits and employer contribution levels. It is therefore essential that they carefully consider their investment strategy, selection of investment managers and investment performance. Trustees are legally required to take advice from an appropriate person for almost all investment decisions and most have investment consultants to assist them.  

Trustees would generally obtain an investment monitoring report for consideration at every meeting. This would typically include items such as:

  • A report on the market since the last report and the market outlook
  • Details of the investments held by the trustees
  • Scheme performance
  • Manager performance
  • Funding monitoring

Actuarial matters

Legislation requires that the Scheme Actuary performs a full actuarial valuation of a scheme at least every three years. In brief, this involves:

  • the Scheme Actuary giving advice on relevant matters
  • the trustees determining funding principles
  • the trustees setting assumptions for any uncertainties such as investment return, inflation and mortality
  • the Actuary using those assumptions to calculate the resulting estimated current value of future benefits payable from the scheme based on accurate data at the valuation date
  • comparing the estimated value of those benefits with the current value of the assets
  • the trustees and employer agreeing a plan to remove any shortfall of assets relative to liabilities.  

The Scheme Actuary is required to provide a more approximate funding update every year between full valuations. These are known as actuarial reports.

Actuaries are involved in other work relating to pension schemes. For example they:

  • provide advice on the assumptions to be used when calculating transfer values
  • typically advise on (and sometimes are responsible for setting) factors associated with benefit calculations from the scheme, such as early retirement factors and commutation factors. 
  • sometimes help with complex benefit calculations
  • provide various calculations and certificates required by legislation or by professional bodies. For example, the actuary has to periodically submit a statutory valuation known as a Section 179 valuation which affects the PPF levy payable in respect of the scheme.

Covenant matters

The third major factor relating to being able to pay the right benefits from DB arrangements is the strength of the employer covenant.  

Trustees need to keep a close eye on the strength of any employers associated with the scheme, and it is very helpful for trustees and employers to have an open and honest relationship. It would generally be appropriate for an employer to give a regular update on its performance and outlook at trustee meetings. It may be necessary for trustees to sign a non-disclosure agreement if anything confidential is to be notified to them.

Many trustees now appoint independent covenant advisers – consultants who will scrutinise the available information about employers and are well-placed to spot any warning signals. Covenant advisers help trustees to ask the right questions of scheme sponsors. They should also be able to assist with any negotiations with scheme sponsors. 

Thinking in the round

Actuarial, investment and covenant considerations are not discrete factors and are highly interrelated. Making decisions in respect of any of the three matters requires consideration of the other components at the same time. The Pensions Regulator expects trustees to have an integrated risk management framework in which to make such decisions. Other key areas of importance are governance and administration which are explored in other sections of this Handbook.