And lots of conversions of discretionary increases ... S

1
A Year in the Life of a TrusteeAIMSE Conference

• Guy Willard, Angela Docherty, Nigel Moorcroft
• 2 February 2006

2
Setting the Scene

• Our Pension Fund
• Set up 1970 plenty of schemes were
• Struggled through 1974/75 - a real market
  downturn
• Plenty of surplus in the 1980s
• Contribution holidays and benefit improvements
• And lots of conversions of discretionary
  increases
• Then a bit of a wobble at the end of the 1990s
• Which got much worse in the 2000s
• So now we have a big hole in the ground
• Now read on ..

3
Sizing the Problem

• Company
• Market Cap 500m
• Profits 50m
• Credit Rating A

• Pension Fund
• Assets - 500m
• FRS Liabilities - 600m
• deficit 100m
• Buy out Liabilities - 750m
• deficit 250m
• Maturity 40/30/30
• Actives/Deferreds/Pensioners
• Assets 60/40 equities/bonds
• Regular cost 10m

4
Introduce Our Two Trustees

• Miss Trad
• Has been with the company for 20 years
• Is the Finance Director
• A trustee for the past 10 years
• Been through good times and bad
• Has seen how the system works
• Mr New Boy
• Newly appointed, after an acquisition
• Understands new employee relationships
• Works in the purchasing department
• Has read all of the Codes of Conduct
• Has been force fed Financial Economics

5
A Regular Actuarial Valuation
6
Mr New Boys Thinking on Deficits
Liabilities (buy-out)
Assets
7
Mr New Boys Views on Deficits .

• A pension scheme in deficit should be treated in
  the same way as any other material unsecured
  creditor. Guiding principle
• Trustees should learn from the way a bank with a
  large unsecured loan would look to negotiate with
  a company 82
• additional contributions from the employer will
  be the greatest amount that the employer can
  afford, as evidenced by the employers ability to
  pay
• specimen statement of funding principles

8
Miss Trads Response

• Trustees should aim for any shortfall to be
  eliminated as soon as practicable What is
  possible will be dependent on the financial
  circumstances of the employer 53
• Trustees should ensure that any recovery plan
  aims to eliminate the shortfall within a finite
  time and that it is realistically capable of
  being followed. 51

9
The Discussion Continues

• Mr New Boy our duties
• Miss Trad the Regulator and the PPF
• Mr New Boy PPF coverage
• Miss Trad the PPF put option
• and then .
• THE VOTE!

10
The Valuation Vote

• As Trustees is our bottom line for the Company to
  pay
• A The Full Buy-out Deficit as soon as possible,
  no longer than 5 years (minimum 50m pa special)
• B Our previous ongoing funding approach
  (slightly weaker) spreading over 20 years (5m pa
  special)

11
Life Moves On

• Special Contributions agreed at 10m p. a over 10
  years.
• Plus agreement to consider extra security
• But ..
• Member contribution increased to 10 of pay (via
  flex)
• Early retirement terms all removed NRA 65 now
• And
• Redundancies announced
• And
• A Covenant Sub-Committee of the Trustees is
  formed

12
Covenant Monitoring Meetings
13
The Pensions Regulator and Covenants

• In order to negotiate trustees need to
  understand the sponsoring employers financial
  position and the strength of its commitment to
  the funding of the scheme. 83
• Trustees should review these documents where
  the nature and strength of the employers
  covenant has changed and the employers ability
  and willingness to fund the scheme has either
  improved or declined significantly 78
• Trustees should be alert to information about
  the employer which is in the public domain and
  seek an agreement with the employer to keep them
  informed of matters which are likely to have an
  impact on the scheme. 79

14
New Monitoring Tools
15
Dynamic Deficit Monitoring

• One of our monitoring dials has gone off the
  screen

16
Covenant Conversations

• Mr New Boy more money?
• Miss Trad worst time?
• Mr New Boy more security?
• Miss Trad consider pledges
• but then
• No VOTE (yet!)

17
Not all news is bad news

• Market rumours of a bid
• Merger of two weak players?
• May involve greater amounts of debt
• The Covenant Committee goes into emergency
  session

18
Mr New Boys views on Acquisitions

• The pension scheme is a key company stakeholder.
  Trustees should be given access to information
  and decision makers in return they should accept
  confidentiality responsibilities. Guiding
  principle
• Trustees should enter into a confidentiality
  agreement every time a new trustee joins the
  board 87
• In order to negotiate trustees . should
  monitor corporate activity and seek the
  employers agreement to be given information at
  an early stage 83

19
Mr New Boys views on Conflicts

• A trustee involved in both sides of the
  negotiation (for example a finance director or
  chief executive) should ensure that the
  trustees have the appropriate information on a
  timely basis and absent himself from the trustee
  meetings when the issue is discussed and play no
  part in decision making 90
• or to paraphrase..
• anybody that might have relevant useful knowledge
  should not take part in crucial meetings!!
• and so
• A VOTE

20
The Conflict Vote

• A The Finance Director should be a member of the
  Trustee Board
• B The Finance Director should not be a member of
  the Trustee Board

21
Life Moves On

• but not as expected
• Our Company does not go ahead with its bid ..
• but is itself bid for
• by a Venture Capital firm
• which offers a special contribution of 50m and
  two 25m p.a.
• The extra contribution is contingent on the
  Trustees agreeing to
• no future accrual
• a review of investment policy to reduce risks
• The Trustees debate the change in policy

22
Review the Investment Policy
23
Views Differ

• Mr New Boy - risk is the amount not invested in
  bonds
• Miss Trad - mixed views FRS and actuarial
  valuation
• Mr New Boy investment does not affect
  liabilities
• Miss Trad is this the time?
• Mr New Boy the Company's views on risk

24
The Discussion Continues

• Miss Trad
• A move from 60/40 to 20/80 would be too drastic
• Phase it over 5-10 years, with a lockstep system?
• Mr New Boy
• How about putting in place a swaps overlay
• to match out the duration and inflation risks?
• Miss Trad the end of capitalism??
• until
• THE FINAL VOTE

25
The Final Vote

• A Switch from 60/40 to 10.90 immediately, with
  swaps overlay, portable alpha for the 10
• B Phased move from 60/40 to 30/70 over 3 years,
  based on lockstep gains.

26
Life Moves On

• Or does it?
• What does the Future look like?
• For Pension Schemes
• For Trustees
• For Companies
• For Members
• And for Fund Managers???

27
A Year in the Life of a TrusteeAIMSE Conference

• Guy Willard, Angela Docherty, Nigel Moorcroft
• 2 February 2006