Tales from the virtual trustee: Part 1

We are one hour into a four-hour virtual trustee meeting. Everyone has managed to successfully use the software apart from one whose camera isn’t working and has ended up dialling in, a disembodied voice occasionally interrupting. Weather, weekend activities and localised lockdowns discussed, we dealt with the preliminaries; quorum, minutes, outstanding actions etc., ably guided by our Scheme Secretary from the middle right of the screen, and cracked on with the main subject of the day – the preliminary results of our latest valuation.

So far, we have assessed the covenant, with the assistance of our covenant advisers, as tending to strong (as best we can with the Covid effect on the economy), supported by a newly negotiated, generous parental company guarantee (PCG), with proportionate steps taken to determine the realisable recovery, and feel confident with our single discount rate based on gilts plus 1.0%.

Our Actuary explains that this leaves a £18m deficit on the Technical Provisions (ongoing funding) basis and suggests a 6-year Recovery Plan (RP) at £3m p.a. (keeping the maths easy).

The Sponsor suggests that in the Covid environment it needs a little more wriggle room and a back-end loaded RP would be preferrable, starting at £1.5m and increasing each year over the 6-year term. This would enable investment needed now in PPE for the staff, the development in IT security, cloud storage and hardware for staff working from home and additional shop floor space to enable appropriate social distancing for continued on-site production.

The return on investment presented for the proposed corporate expenditure all seems reasonable and fair and we feel almost ready to agree the valuation, Statement of Funding Principles, the Schedule of Contributions and Recovery Plan.

Then, one of our Member Nominated Trustees (MNTs) from the bottom left of the screen asks, what about our Long-Term Objective?

Squaring the circle

We check our Journey Plan. In 12 years we are planning to reach low dependency on a gilts +0.4% discount rate. One of our Employer Nominated Trustees (ENTs) from the bottom right of the screen, after taking a while to come off mute, asks what the sensitivity is for reducing the discount rate by 0.1%. Our Scheme Actuary informs us this would increase the liability by £1m.

The Chair from top right says, “So our current position is gilts+1.0%, which over the next 12 years we will scale back to gilts+0.4%. A total of 0.6% over 12 years (0.05% p.a.), with each 0.1% reduction in the discount rate adding £1m to our liability, so £6m in total.” (told you I was keeping the maths easy).

The Chair says “So, we have a £18m Technical Provisions deficit and a further £6m as we scale back our discount rate over the next 12 years”.

The Professional Trustee, middle left, asks “What’s the Expected Return on Assets and is it enough to cover the 0.05% p.a. scale back on the discount rate?”  Our Investment Adviser, having re-joined following a freezing incident is now middle right, says “the longer-term target return over liabilities is 2% p.a. (i.e. gilts +3%), so we should be OK.”

Our MNT, bottom left, makes the point that we are expecting a global recession, which may mean our growth assets could struggle with this target before the next valuation.

Our ENT, now centre screen following the picture re-shuffle when the Investment Adviser re-joined says, “So we are looking at lower contributions over the next three years on the proposed back-end loaded RP, the stepping down of the discount rate adding £1.5m to our liabilities and questionable returns from our growth assets as they experience the effect of the anticipated global recession.”

The FD, whom so far has just had her initials displayed in a small circle in the bar at the very bottom of the screen says, “I need a comfort break”.

To be continued…