The Association of Professional Pension Trustees (APPT) is pleased to respond to this further call for evidence by the Commons Select Committee on Work and Pensions.
Our summary of the place and role of the APPT and professional trustees in the governance of pension schemes is set out in Appendix 1 to this document.
The executive summary from APPT’s response (dated 15 November 2022) to the Select Committee’s original call for evidence dated 24 October 2022 is repeated in Appendix 2 to this document for ease of reference.
APPT notes the launch of TPR’s consultation on its draft updated code of practice on Funding Defined Benefit Pension Schemes and its regulatory approach on 16 December 2022. The consultation has been widely anticipated and communicated within the pensions industry.
TPR’s existing code of practice on Funding Defined Benefit Pension Schemes was last revised in 2014 (Great Britain) / 2015 (Northern Ireland). Since then, TPR has issued an annual funding statement with specific guidance for trustees, scheme sponsors and their respective advisers whose schemes are expected to undergo funding valuations in the immediate future, as well as schemes undergoing significant change. TPR’s expectations in relation to scheme funding have therefore been communicated each year since the last revision to the existing code of practice.
Updating the draft code of practice will present an opportunity for trustees, scheme sponsors, their respective advisers and other stakeholders to provide input and for the relevant provisions of the annual funding statements to be consolidated into the code as appropriate, providing greater clarity on TPR’s stance on the various aspects of defined benefit scheme funding.
APPT will respond to the consultation within the timescales set out in the consultation document. We welcome TPR’s commitment to further industry consultation, in the event that significant concerns about herding are raised during the initial consultation period.
Having worked hard to address the short-term liquidity challenges arising from the market turmoil of Autumn 2022, schemes are now considering in a less time-pressured environment whether changes are necessary to their long-term investment strategies. In our experience trustees and their advisers, together with scheme sponsors, have reflected and will continue to reflect on their experience, and views of plausible risks have changed.
The nature of the sector is such that each scheme will face its own individual challenges and opportunities, and we believe that Trustees and their advisers, working with the sponsoring companies, are best placed to work out the right conclusions for their specific circumstances. However, there are clearly lessons to learn from the recent crisis – both on a systemic and individual pension scheme level.
Whilst changes have quite rightly already been made to LDI portfolios to increase collateral buffers in line with regulatory guidance, it seems likely that there will be further proposals of change to come, not least because the Bank of England has indicated to the committee that it intends to publish a statement on appropriate steady-state levels of resilience for schemes on or around March 20. We understand that the various regulators will subsequently publish their own responses to the Bank’s statement.
In light of the above, and should the case be proven for further regulation, APPT would welcome consideration of any proportionate, balanced and coordinated changes to regulation or guidance, consistent with any currently anticipated or future changes to the funding regime and with trustees’ objectives to deliver benefits to members over the relevant time horizon, in the context of a range of scheme and sponsor covenant circumstances.
APPT would additionally welcome any recommendations on measures to be considered to improve operational efficiency of LDI strategies and collateral management, where consistent with the points made above.
APPT would comment further as follows in relation to the role of LDI within overall scheme strategies:
Compulsory accreditation, regulation or authorisation of professional trustees
APPT notes that currently it is not compulsory for a professional trustee to be accredited.
To date over 400 professional trustees have progressed through an accreditation process since 2020 that tests skills and experience and includes a ‘fit and proper’ and other checks. Accredited professional trustees must complete a minimum of 25 hours of continuous professional development every year and also observe standards of practice which were agreed following consultations with TPR.
The potential for more formal regulation or authorisation of professional trustees has been raised during oral hearings relating to the Select Committee’s inquiry. APPT would welcome compulsory accreditation, regulation or authorisation of professional trustees if:
APPENDIX 1
About the Association of Professional Pension Trustees
The Association of Professional Pension Trustees (APPT) is pleased to respond to this call for evidence by the Commons Select Committee on Work and Pensions.
Pension scheme trustees play an important role in the UK pensions system, governing and overseeing occupational pension schemes, with the objective of achieving good outcomes for scheme members and working with the organisations that sponsor the schemes in order to do so.
Most pension scheme trustees are either:
● individuals employed or formerly employed by the organisation to which the scheme relates, or otherwise connected to it, or
● professional independent trustees
As the representative body for professional trustees of UK occupational pension schemes we maintain a set of standards for professional trustees to improve and promote the quality of the service provided by professional pension trustees. We also oversee an accreditation process to uphold these standards which requires professional pension trustees to evidence essential skills and experience and continue to upskill by undertaking a minimum of 25 hours of relevant continuous professional development activity each year.
We act as the collective voice for professional trustees and provide opportunities for member training, feedback and discussion. We also operate a dedicated discussion forum for our members from smaller trustee firms (firms with five or fewer accredited trustees), to provide opportunities for professional trustees with smaller support networks within their own firm or business to connect with a larger group of professional trustees.
We estimate that APPT members work as trustees on over 2,000 defined benefit (DB) schemes. Our members also sit on a large number of trustee boards for defined contribution (DC) schemes including DC master trusts. APPT members each typically work on multiple appointments and in total are responsible for managing schemes with assets of over £1,000bn.
APPENDIX 2
Executive Summary from APPT’s response to the Select Committee’s original call for evidence.
The executive summary from APPT’s response (dated 15 November 2022) to the Select Committee’s original call for evidence dated 24 October 2022 is repeated immediately below for ease of reference.
In responding to this inquiry, we sought views from APPT members on the Committee’s questions, and our submission therefore reflects the experiences of trustees of a wide range of different types of DB (and DC) schemes. Schemes vary in terms of size, in terms of the nature of the sponsoring company or organisation, in terms of their funding position, and in terms of the number of members already drawing benefits: schemes with a large proportion of retirees are generally referred to as “mature”.
● Over the last 20 or so years, most defined benefit schemes have had funding deficits on an ongoing basis. While funding positions have typically improved over that period, most schemes have had a long time horizon to reach full funding on a low dependency basis (i.e. having a low dependency on the sponsoring organisation for further contributions to eliminate those funding deficits) and many may not become fully funded on that basis for a significant period of time.
● A key part of the role of trustees has been, and remains, to seek to improve or maintain funding positions through an appropriate balance of funding from the sponsoring entity and investment returns, and to do so in a risk-controlled way. In particular, trustees are required by a combination of law, regulation, regulatory codes of practice and guidance and their own scheme rules to:
● take advice on their investment strategy and to consult with the scheme sponsor in setting that strategy and making any changes to it
● agree or consult on a funding plan with the scheme sponsor to meet any deficit
● assess and monitor the sponsor’s covenant, i.e. its ability to fund the scheme and underwrite investment risk
● Trustees manage the associated risks in a holistic way, exercising their judgment appropriately based on expert advice. Trustees have to manage a wide range of potential risks, often over a long time horizon, and in relation to investment risk this is done by taking into account the advice from investment professionals as part of reviewing and monitoring the performance of their pension schemes’ investment strategies.
● LDI using leverage is one such strategy that many pension schemes have adopted to manage exposure to changing interest rates and inflation. The objective is to align asset valuations with liability valuations whilst continuing to enable trustees to invest other areas of the portfolio for overall growth in order to meet long-term pension obligations to members.
● LDI strategies are well established and have worked well for the past 20 years in furthering the above objective. Trustees typically work with their investment advisers to ensure that schemes routinely stress-test scenarios including rising yield environments, and that they have collateral to withstand shocks. The speed and scale of the market reaction to September’s “mini-Budget” exceeded the sensitivity of risk modelling, including the Bank of England’s own 2018 stress tests.
● As has been well-commented upon, this situation provided an extreme test for leveraged LDI strategies and, whilst it seems clear to us that most trustees and schemes managed the challenges, many trustees are now considering their future investment strategies in a less time-pressured environment.
● One theme emerging strongly from our members was the diversity of experience during the market turmoil of September and October 2022, depending on scheme specific characteristics.
● The experiences of trustees have also underscored the need to make sure governance and investment processes are reviewed and, where necessary, adapted so speedy action can be taken should there be any repetition of such a sudden market shock.
March 2023