How trustees can fulfill their purpose


– The Pensions Regulator has made trustees’ ultimate objective clear
– Yet many decisions made don’t explicitly match this goal
– You need multiple lenses to make the best investment decisions

Why am I here? What is my purpose?

For thousands of years, the brightest minds on the planet have struggled with these fundamental philosophical questions – the ultimate questions, you might say. You’ll be pleased to hear that I’m not going to try to answer them. Unless you’re a pension fund trustee that is.

If you are a trustee, you’ll also be pleased to know that the Pensions Regulator (tPR) has clarified exactly why you are here and what your purpose is. The regulator has succeeded where Plato, Aristotle and Descartes all failed.

In its recent guidance on setting investment strategy, tPR said this:

“The fundamental purpose of trustees’ investment powers is to generate returns in order to enable the scheme to pay promised benefits as they fall due.”

That’s pretty clear and not particularly surprising. Paying pensions in full and on time is what pension funds are for. So, next time you’re thinking about changing the investments in your pension fund, think about whether the changes are “enabling the scheme to pay promised benefits as they fall due”.

But do pension trustees always do this? In my experience, the answer is “sort of”.

Often, trustees are thinking about increasing returns, diversifying exposures or hedging risks. These all sound pretty sensible things to be doing. But doing them may or may not help you pay benefits as they fall due – that will depend on your specific circumstances. Many trustees’ investment decisions are, at best, only implicitly focussed on paying pensions.

The good news is there are ways you can ensure your investment decisions are explicitly focussed on paying pensions. My colleagues, Dan Mikulskis and Alex White, together with Professor Paul Sweeting, recently wrote a thought piece explaining how you can now measure the likelihood that you will be able to pay pensions in full and on time – using a measure called POPP (or Probability of Paying Pensions). You can read it here.

You can use POPP when setting investment strategy to see if changes are making it more or less likely that your scheme will succeed. It will allow you to understand whether the changes are really worthwhile, and are genuinely making it more likely that every member receives everything they’re owed.

Of course, this isn’t the only metric that you should be focussing on – as it’s not the only question you should be asking. POPP tells you a lot, but it doesn’t tell you how bad things can be if things go wrong.

For example, imagine two investment strategies, A and B.

Strategy A has a POPP of 90% (i.e. nine times out of ten all pensions will be paid in full).

Strategy B has a POPP of 0% (i.e. there’s no chance at all that pensions get paid in full).

Which is better? It’s got to be Strategy A, right?

Or is it?

You need to also ask what happens when members don’t get paid. We could compare the strategies another way…

Let’s say Strategy A has a 10% chance of benefits being cut by 100%.

Strategy B has a 100% chance of benefits being cut, but only by 1%.

Now I’d probably go for Strategy B. Wouldn’t you?

To get the full picture, you need to use POPP alongside other risk measures, such as VaR. This will allow you to get a feel for what’s really going on. In my example, Strategy A would have a huge VaR, and Strategy B would have a tiny VaR.

If you’re a trustee making investment decisions, the next time your consultant suggests changes, you should ask this:

Will the change make it more or less likely that the scheme can pay “promised benefits as they fall due”?

If you’d like to discuss how POPP can help you answer this question, please do get in touch.


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