The past fortnight has demonstrated how pension schemes can be significantly impacted by unexpected turmoil in financial markets.  Many defined benefit (DB) schemes with hedged liabilities (including as part of a liability driven investment (LDI) strategy) have faced calls to post collateral in response to the rapid increase in gilt yields, giving rise to liquidity difficulties for some.

After dealing with the initial shock to investments and managing short-term liquidity needs, what can trustees do to ensure that they are well prepared to respond to any future disruption?   

While many of the issues which have arisen are financial rather than legal, we suggest that trustees ask themselves the following questions:

  • Did (or would) the terms of your trust deed, or articles of association, enable you to call a trustees’ meeting at short notice?  If not, consider updating the deed / articles to enable you to take swift action when needed.  Practically, do you have adequate contact details for all members of your trustee board, including for those who may be on holiday and not logged on to your scheme/employer’s system?
  • Does your statement of investment principles (SIP) need updating to reflect any changes in asset allocation or approach which you adopted in response to recent events?  Legislation requires a scheme’s SIP to be reviewed “without delay after any significant change in investment policy” – so there is leeway to alter a scheme’s investments in response to changing conditions, provided that the SIP is updated shortly afterwards.
  • Going forward, could your SIP be amended to give flexibility to deviate from your expected investment approach when appropriate, while remaining within the SIP’s terms?  Despite the apparent leeway in the legislation, trustees may feel uncomfortable about departing from the terms of their SIP – and doing so may result in a note by the auditor in the scheme accounts.
  • What resources could you draw on if your liquidity needs escalate in future?  Pension legislation permits trustees to borrow, provided that this is only for the purpose of providing liquidity and on a temporary basis.  Although many sponsoring employers are not in a position to provide additional support, some employers have been willing and able to offer short term loans to their pension schemes in recent market conditions.  If this might be relevant to you, consider engaging with your sponsor (or other potential sources of support within your corporate group) and putting documentation in place, in advance of it being needed.
  • Do the objectives set for your investment consultant need revisiting?  In reality, you are likely to have been in frequent contact with your investment consultant throughout the recent turmoil, with your objectives for the consultant evolving in response your needs.  However, remember that legislation requires you to review your investment consultant’s objectives “without delay after any significant change in investment policy” – if this applies to your scheme, you should review your objectives and ensure that any changes are properly documented. 
  • Do the actuarial factors used for calculating cash equivalent transfer values (CETVs); pension commencement lump sums (“tax free cash”); and early or late retirement factors need revising in light of market changes?  Check your rules to find out if the employer’s consent is needed to changes in factors (other than the calculation of CETVs, which is for the trustees to decide), then speak to your scheme actuary.
  • Whilst rising gilt yields have caused short-term liquidity concerns, over the longer term they have reduced liabilities, making buy-in/buy-out more feasible than may have been imagined.  In the current market, insurers are able to pick and choose which requests for quotations they respond to.  Ironing out any uncertainties in your benefit specification; completing GMP equalisation and reconciliation; and ensuring your data is as complete as possible will make your scheme more attractive to insurers if and when you approach the market.


Authored by the Pensions Team. 


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