The secret of fully securing your members’ benefits

 How on earth would you run a pension fund these days without a journey plan?

I’m not saying it’s impossible. Research for the Pensions Regulator published last year found that 30% of UK DB schemes didn’t have a journey plan, rising to over 40% for smaller and micro schemes. So presumably some funds are either managing ok without, haven’t got round to it yet or perhaps are just “dancing in the dark”.

Maybe it’s something to do with our maritime heritage - it’s rare for any journey to begin without a pre-agreed destination - but the Merchant Navy Officers’ Pension Fund (MNOPF) was a pioneer in this area.

Fifteen years ago, the fund was divided into two portions: the old section for pre-1978 benefits and the new section for benefits after that. Whilst the Old Section was quite well funded, the New Section had a funding ratio at one point below 70%, a poorly mapped-out governance structure and a lack of accountability and ownership on investment matters.

We could not continue down the path we were on. So we set about making major changes, establishing “Journey Plans” (relatively unheard of at the time) that would result in a better funding level over an agreed period. They would also ensure the running of the scheme was effective, efficient and wholeheartedly in the members’ best interests, while also transparent to the nearly 350 participating employers.

A new model

For us, a moderately sized fund, this meant accepting that not everything required of a pension fund could be done in-house. Greater and clearer accountability for investment decision-making and execution was essential if we were going to reach full funding by 2025, and we felt the best way to achieve this with minimal risk was for the fund to become an early adopter of the fiduciary management model.

While the trustee board remained responsible for overall levels of risk and the investment strategy, an external fiduciary manager mandate would make portfolio construction and decision-making more dynamic and opportunistic, with additional value added through manager selection, asset allocation and liability hedging designed to provide required investment returns with less risk. It would also enable the trustees to sleep better at night knowing all of the detail was not with us.

Simultaneously, by doing away with the investment committee, it meant the whole board was involved with investment strategy decisions which has undoubtedly led to a better governance model.

Early days for delegation

At that time, delegation was in its infancy. We had to travel to the Netherlands to learn more about how their large funds considered delegation; no large UK funds had been brave enough to do it at that point. But if we were going to radically improve our funding and execution capabilities, we had to be innovative.

We knew, too, that we needed to manage the process carefully and ensure that we were being thorough with our decision-making. We ran what is believed to be the first intermediated fiduciary management tender exercise involving a great many providers, appointing Willis Towers Watson as our external fiduciary manager, or Delegated CIO (DCIO) in 2011.

Delegation does not come without checks and balances. DCIO is a powerful position and we appointed an independent investment adviser to oversee its work - another innovation that has since become more widespread.

The success of these measures has been evident in the subsequent improvement in the scheme’s funding position, with the Old Section now fully insured and bought out, the latest iteration of the New Section Journey Plan targeting 103% funding by 2026, and a significant proportion of our members' benefits fully secured through buy-in and buyout transactions with insurance providers.

It seems strange now to consider that only two decades ago, we - along with the rest of the UK’s DB pension funds - had no clear concept of our ultimate destination, let alone how we might get there. Stranger still that some, even now, apparently have no end-game in sight and may therefore still be dancing in the dark.

Rory Murphy is trustee chair of the MNOPF and the Ensign Retirement Plan.