United Kingdom
The gorilla in the garden - Richard Farr
Why compare a DB pension scheme to a gorilla? Because the size of the deficit that many companies face, the fact that directors can in certain circumstances be held personally liable for any shortfall, and the possible conflicts of interest around DB pension schemes mean that they have the potential, if unchecked, to create huge damage to you and your company.
So consider this. If you opened your curtain one morning and saw a 200kg gorilla in your garden what would you do? Close the curtain and check again in three years time? Probably not. Yet, effectively, that is the decision corporates and trustees are taking when they leave their DB pension schemes to tick over between triennial reviews and valuations.
Of course, there are good reasons why CEOs and FDs don’t address their DB pension schemes as fully and frequently as they would like to. There are governance and strategy issues all the way from the boardroom to the shop floor, differing valuation methods that make it hard for even an FD to keep track of liabilities and, of course, the rather more pressing need to steer your business through exceptionally challenging times. Add the fact that DB pension schemes are operating on a 20-30 year timeframe, or longer – perhaps with little demands on current cash flow – and the temptation to leave the gorilla in the garden is easy to see.
Finding solutions
It is vital that you act in 2010. The credit crisis has exposed the real risk in defined benefit pensions and this has raised awareness among all the stakeholders - from shareholders and trustees to lenders and potential new recruits. Investors and management talent are going to be wary about getting involved with companies who haven’t faced the future with clarity.
The good news is that if you take action now the situation may not be as intractable as you think – as long as it is approached realistically and addresses the full range of issues. That’s why our team combines high-level experience in the corporate, regulatory, capital markets, actuarial and restructuring spheres. This breadth means we can help you find pension solutions that work alongside your corporate goals.
So what can you do? Of course, each case is different and requires careful individual analysis, but the key points apply in general, to both the employer and the Trustees.
- Don’t ignore conflict – address it
- Identify and calibrate your risks and then monitor them continuously
- Build a strategy and execute it at the right time
Conclusion
To go back to the gorilla in the garden analogy: the longer you leave it, the bigger and hungrier it may get. Feed it, learn how to communicate with it or reach for your tranquiliser gun, but don’t, whatever you do, ignore it.
If you would like to discuss any of the issues raised in this article please contact Richard Farr on +44 77 64 90 30 60.