As a new year begins, trustees of defined benefit pension schemes are likely to be drawing up or refining their business plans for the year ahead.
In doing so, they may take a moment to pause and reflect on their journey so far and consider whether any actions flow from that journey.
Many trustees currently find themselves in a markedly different landscape from that which they might have imagined as recently as 18 months ago. After a period of turbulence in financial markets, many schemes are now in a significantly improved funding position. This improvement can largely be attributed to a rise in both interest rates and gilt yields.
It has been over a year since the Liability-Driven Investment (LDI) crisis, and now that the dust has settled trustees can look back on their scheme’s journey from then to now and assess the impact of the crisis, how it was managed and, crucially, whether lessons can be learned from the experience.
Trustees play a pivotal role in safeguarding the assets of pension schemes. Where a pension scheme has suffered a loss, trustees are required to investigate the reasons for that loss and, where it would be in the best financial interests of members to do so, to take steps to recover it.
While trustees have a duty to take steps to recover losses, they are not required to indulge in speculative litigation in pursuit of all possible losses to the pension scheme.
Trustees should, when evaluating the effect of the crisis on their pension scheme, review the decisions made and advice given. If trustees feel that losses were suffered that may be recoverable, they should seek legal advice on this matter – and do so before the ability to bring a claim is lost.
The lessons learned from the LDI crisis should not fade into the background with time. Instead, they should serve as a beacon guiding trustees towards more robust, resilient, and adaptive strategies. Where there have either been no losses suffered, or the losses are not recoverable, trustees can still take the opportunity to review the strength of risk management frameworks, and the resilience of investment strategies in the face of unforeseen market fluctuations going forward.
As trustees get back to work and draw up their business plans for the year ahead, they may wish to add an LDI review to those plans.
If you would like to discuss how we could help please visit our Pensions page.
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