Everywhere I go I keep hearing the phrase “When the fun stops, stop”. This is a campaign created to promote responsible gambling standards. I am not a gambler but even I can understand the message and the sentiment.
As a pension trustee, I spend a lot of my time thinking about where to invest the Scheme’s money. There are many people who help me with this providing advice and solutions. And there’s plenty of innovation with exotic and elaborate investment vehicles promising to cure all the financial ills my schemes face.
But what happens when investment returns do not come to the rescue. After all, I have sat in many trustee meetings with an investment specialist telling me that the assets have performed well returning 5% or 10% over the year only for the Scheme Actuary to tell that the liabilities have returned 30% or 40% over the year. Net, net, I am down 20% or 30% and my funding level takes a pasting. Still, never mind, we can always ask the sponsor for more money to make up the difference. Or we can hang in there and hope that next time everything will be fine by taking the same risks again?
It is this cycle that makes me, as a trustee, understand the investment risks we are taking. The financial impact of the risks we take can be dramatic especially if the deficit payments the company needs to make are putting jobs on the line. Further, when the investment specialists that we rely on are asked for their views on what has happened, they are usually clear that it was not their fault. If we disagree, then we can tell them off or sack them. But that’s not much good for our members and the sponsor who are still left with the pieces to pick up.
Still, I am old enough to remember the good times. Times when it was normal for the assets to outperform the liabilities. I guess it did not feel like gambling back then because we were always winning. Now we are losing and that is no fun.
There is a fine line between investing to get the best you can for your scheme and plain old gambling. Trustees need to think carefully about their investment decisions and the possible consequences. They should remember that when the fun stops, stop.