news article

Trustees failing in good governance

07 December 2011

Muse Advisory, the independent pensions governance and administration consultancy, has cautioned Trustees to better monitor the scheme sponsor.

Mark Hodgkinson, Director, commented: "Trustees hear about the importance of risk management all the time, but many only pay proper attention to the sponsor covenant at certain specific times. This may be acceptable for pension funds that operate largely free of the need for the sponsor's financial support, but surely not where trustees are striving to balance their obligation to address a funding deficit with the risk of damaging the employer's financial prospects. In such circumstances, a weak employer covenant will generally be the largest risk of all and certainly greater than the risk represented by a typical investment manager for example.

"We all recognise that the relationship between trustees and sponsors is subject to inevitable tensions. Often these tensions are exacerbated because trustees and sponsors only talk at times of crisis. By allocating more time to regular discussions with the sponsor and relegating matters of lesser risk further down their agenda, trustees can become more active in managing sponsor covenant risk by earlier identification of threats and opportunities. They would also be investing time in building a stronger relationship with the sponsor based on enhanced understanding of their respective concerns. Trustees who successfully invest in the relationship can expect ‘dividends' to accrue when crisis moments arise."