Mansion House and the ‘butterfly effect’ on pension schemes

It’s an odd time to be a pensions trustee. Ever since the Mansion House speech the strategic map for each scheme has changed – and not just a little. A ‘back to the drawing board’ review seems to be in order.

Instead of seeing ourselves as fortunate to scrape across the buyout line to guarantee members’ pensions, we now have a multitude of choices and surpluses to manage. And now we are no longer working in the interests of members alone, but apparently the fate of the UK economy is on our shoulders.

At the same time, the available options have changed. We now have a commercial consolidator under way, even if only for two schemes, and the prospect of a public sector consolidator to help those small or ‘not quite there yet’ schemes that want to reach member security but have fewer market options.

Schemes with strong covenants and surpluses are being positively encouraged not to buyout but to run on for further surplus generation.

For trustees, and according to all the pronouncements of pension ministers, this is all, at heart, a series of decisions about the best interests of our members.

For those well along the path to buyout, if there is now an unexpected surplus to be shared, how should that be allocated?

It is arguable that the original pension scheme principle, even if protected by discretions and caps, was that pensioners should be protected from cost-of-living increases. Yet pre-1997 pensioners have in many cases not seen inflation increases, and very many others will have had capped increases well below inflation by any measure in the last two years.

These things matter to pensioners hugely, as the resulting reduction of their income in real terms is lifelong unless we use surpluses to remedy it now.

Although sponsors will point to deficit payments into schemes, surely members have a call on surplus funds too – and not only for real term pensions, but also because alongside employer deficit contributions, the majority of members will have been paying higher contributions for lower accrual rates compared to when they joined the scheme, as a result of the low risk calculations used for valuations.

If a scheme sees itself as well enough supported by employer covenant to be able to consider running on to increase that surplus for the benefit of members and sponsors, then a strategy for both the security of members’ accrued benefits and also a way to share the advantage to them of running on – bearing in mind the additional risk they face by doing so – needs to be devised.

Such a plan needs to be possible without it turning into a guaranteed benefit adding extra risk to the sponsor. There are other questions: how large a surplus is enough to begin payments? What is the risk appetite for the whole fund or the surplus section? And, of course, does it include UK productive capital?

Members will benefit to some extent from the employer receiving part of the surplus, as it should strengthen the covenant, and thus the calculation of the surplus, in one of those endless decision-making loops.

Arguably they also benefit from increased UK investment from the pensions industry if the domestic economy improves, as mostly this will be the environment in which they get to spend that pension.

On the horizon, the issue of investing in productive capital brought the dreaded ‘fiduciary duty’ definition to the fore. An unexpected outcome of Mansion House has been the Financial Markets Law Committee report, which has, in the process, clarified the queries emerging about investing for sustainability.

Arguably, now it is much clearer to trustees that the financial climate and the global economy for the lifetime of members is a financially material risk to their pensions. Thus, effects from climate change disrupting markets, or even social factors that create global market risks, are now factors to be considered in the management of assets.

Has the chancellor’s Mansion House speech been the butterfly wing catalyst enabling pension trustees to be able to take a much more holistic and active view of sustainability?

Maggie Rodger is co-chair of the Association of Member-Nominated Trustees.