Time to Focus on Getting Things Done. Delivering Pensions Stability faster. Risk. Reinsurance. Human Resources.

Transcription

1 Aon Hewitt Retirement and Investment Solutions Time to Focus on Getting Things Done Delivering Pensions Stability faster Risk. Reinsurance. Human Resources.

2 Time to focus on getting things done Delivering Pensions Stability faster When asked what keeps them awake at night, individuals with responsibility for a DB pension scheme regularly cite issues such as lack of time, resources, knowledge and information. In other words, they worry about their collective ability to make decisions and implement them effectively. Such concerns are understandable the number of issues facing pension schemes continues to expand, the regulatory requirements continue to grow, and making the right decisions gets increasingly important as defined benefit schemes mature and become less able to bounce back from set-backs. As part of our 2015 Pension Conference series we spotlighted that it was Time to focus on getting things done, presenting the results of the research we had carried out into pension scheme governance and successful delivery models. We considered how a pension scheme should be organised in order to get the best possible chance of carrying out the tasks necessary to reach Pensions Stability. We concluded that this meant ensuring a few things: that the right decisions and actions are taken and that they happen at the right time; that the right people make those decisions and take those actions (that they have the right skills to do so, and that they would not be better done by others); that the right information and advice is available to feed into that process; and that all of the above is focused on getting the right results in line with the long-term objective, for instance, of achieving Pensions Stability. For many schemes the need for change is compelling. They recognise that making changes to their decision-making process now could have a real and long-lasting impact on the issues that their scheme is facing. At our Pension Conferences, and over the remainder of 2015, we invited pension scheme representatives to consider the extent to which they agreed with 12 self-assessment statements to evaluate where they currently stand in relation to some of the issues described above. We were pleased to receive over 250 responses from a wide range of pension schemes. The responses to these statements revealed the following standout statistics: less than a third had a business plan with SMART (Specific, Measurable, Achievable, Realistic and Time-bound) objectives and a strategic focus for their pension scheme; almost half said that they often find themselves discussing the same issues at multiple meetings, resulting in delays of months between opportunities being raised, decisions being made and ideas being implemented; and around 40% indicated that they would not be able to consider new opportunities at short notice for example, nearly two out of three respondents acknowledged that they would not be able to take advantage of attractive short-term buyout prices. Based on this, in summer 2016, Aon is launching a more formal self-assessment service for pension schemes, covering a wider range of issues for both scheme trustees and sponsors. The Governance Challenge is available at aonhewitt.co.uk/governancechallenge. In the meantime, this paper contains a summary of the responses for each of the original 12 statements, together with some ideas on how to address the underlying issues behind the headline statistics. 2 Time to Focus on Getting Things Done: Delivering Pensions Stability faster

3 The statements and responses in more detail This section considers in more detail the 12 statements we posed to our conference delegates and provides some ideas on how schemes might improve their operational effectiveness. The statements fall quite naturally into four related areas how decisions are made, roles and responsibilities, strategy and how opportunities are managed. Decision-making Of all 12 statements, the one which received the highest level of agreement was the length of time it takes to make decisions, with nearly 70% of respondents agreeing that decisions sometimes take months from being raised to being implemented. In addition, well over half of our respondents felt that the same issues are discussed at multiple meetings. In an environment where opportunities can be transient, particularly in the investment and risk settlement markets, delays and indecision can lead to missed opportunities, resulting in an increase in the journey time to full funding and the risks that schemes continue to face along the way. What is causing these delays and how might schemes improve? The chart below shows the time spent on various items at a typical trustees meeting: Meeting end Hours Meeting start Periodic projects eg valuation factors Comfort breaks Operational eg budgets, risk register, audit Latest legislative change Employer covenant reporting and PPF levies Administration, member comms and special exercise reporting Funding level/fund performance review Training Formal opening/ apologies/minutes etc Strategic decisions As you can see, the majority of the time is spent reviewing things that have already happened and information already provided, carrying out training and formalities, and thus there is little time for strategic value-add items. Three out of five respondents agreed with the statement that there are frequently items on agendas that do not need any decision to be taken. Although some items clearly do need to be reported on and noted, these should not be dominating meetings to an extent that genuine decisions cannot be effectively taken. Moving items into meeting pre-work and improving inter-meeting decision-making on more routine items both channel more of the scarce resources towards the forwardlooking and value-adding agenda items. Roles and responsibilities It was pleasing to see that the majority of respondents agreed with the statement that the people making decisions and taking actions are always those who are most likely to get the best outcome. However, while respondents were happy that the right people were getting involved in making decisions, nearly two-thirds 1 of respondents felt that decisions and actions touch more people than necessary, including people who do not contribute much to the decision. This apparent contradiction highlights a possible feeling of inefficiency within the current decision-making process. It was also interesting that 57% of respondents felt that individuals focus their time on agenda items that they find most interesting rather than those that are key priorities. While that is clearly not surprising, effective governance is about focusing time on the most complex, important and high risk issues, not just those which happen to be most interesting. Our thought piece titled Governance: Delivering Pensions Stability Faster includes suggestions on how to improve scheme efficiency and deliver better governance through reviewing individual pension scheme processes. A key component of this is avoiding unnecessary steps and ensuring that actions are taken by people with the right skill set. Managing opportunities The vast majority of pension scheme stakeholders will be familiar with the concept of a risk register, but few registers include the risk of missing an opportunity. Over 60% of respondents agreed that it is often difficult to find enough time at short notice to appropriately consider new opportunities this is consistent with the message which came from Aon Hewitt s 2015 Global Pension Risk Survey, where respondents cited lack of time as the biggest 1 Includes Strongly, and Slightly. Aon Hewitt 3

4 thing impeding their ability to make the best decisions in connection with their pension scheme. A related concern, the ability to act quickly was third on the list, again fitting with the responses above. 67% of trustee boards currently meet quarterly 2 ; even so, such meetings are unlikely to be sufficiently frequent to respond quickly enough to time-critical matters. We chose the example of the buyout market becoming 10% cheaper to test this further, and asked whether delegates would know about this if the opportunity arose in practice. Only 3% strongly agreed that they would. The implication is that trustees are likely to have to settle for sub-optimal outcomes, unless there is an agreed way of picking up time-critical items between meetings and the time spent at meetings is focused on the areas that will deliver the greatest value. Creating and maintaining an equivalent register of opportunities could add value for those schemes that do not have such a process in place now. Such a tool enables stakeholders to quickly review the range of ideas available and identify those which could add the most value. It also provides a mechanism for periodically reconsidering ideas that were previously rejected something that nearly half of our respondents do not currently do. Strategy An item that arguably should be first rather than last on our list is strategy. But in our experience strategy is too often left until last because day-to-day matters are so time consuming. It is often only once the trustee board is being efficient that they can find the time to evolve their trustee meetings to focus more of their time on the strategic direction of their pension scheme. Such strategic attention would clearly be valuable to many schemes, as around a third of our respondents felt that they do not have a strategically-focused business plan for their scheme. A greater proportion, around 48%, felt that they had no operational plan, covering how the governance of the scheme would develop over time. As a first action, we strongly encourage all schemes to develop a proper business plan if they don't already have one. If you've attended our 2016 conferences then a sample was available to take away. If you didn't attend and would like our sample business plan, please get in touch. Possible solutions Based on our research and experience, most schemes could operate more efficiently, ensuring they get the time to focus on the areas they want. Some solutions have been outlined in the previous sections, but the optimal solution for each scheme will be different. Our 2016 Governance Challenge explores these issues in more detail, but as starting point we suggest that trustees consider a combination of three delivery models, which we ve called Get Busy, Get Simple and Get Help. Get Busy is where the stakeholders do just that they have and dedicate the time to getting busy and getting involved in everything from decision making to day-to-day operations. They have the knowledge to devote to the task. They have the right people to be involved at all levels. Get Simple is where the stakeholders agree to run a deliberately simplified model. It is simple to run, and probably has a lower running cost, but it may not be optimal either because it misses some opportunities or it leaves financial risk or the possibility for misunderstanding. Get Help is where the stakeholders outsource some or part of the delivery for someone else (with the appropriate skills and resources) to run, taking the strategic direction set by the trustees and sponsor through into implementation. It is intended to ensure that the scheme can benefit from all the opportunities available, but without the stakeholders, eg, trustees, having to Get Busy. No trustee board or corporate pensions team will be likely to operate under any one model for every single process in practice there will be a mix whereby certain things have the time devoted to them, some are simplified and others are delegated. Getting the right overall delivery model is about getting the right mix of these approaches, but with just this small change we believe there are advantages in a range of areas: decision-making improves because boards have more time to spend on the most important decisions roles and responsibilities are clearer, with better division of tasks time is created for dealing with opportunities on a more timely basis the rigour of considering how to deal with each item results in a greater focus on strategy, and what is crucial to the scheme. The legacy of today s trustees should not just be the financial state in which they leave their scheme. It should also include the governance structure that they leave behind a delivery model that can meet the challenges of the pensions environment, now and in the future. If this paper has led you to consider how your operational framework might be improved to benefit your scheme and its members, we would be happy to discuss this with you. Alternatively, take our "Governance Challenge" at aonhewitt.co.uk/governancechallenge 2 Reference: Accompanying report on the 2014 (eighth) Scheme Governance Survey, The Pensions Regulator, DB schemes with over 100 members. 4 Time to Focus on Getting Things Done: Delivering Pensions Stability faster

5 Summary of responses The following 12 statements provide an indicate of effective governance and decision making. In each chart the extreme positions are indicated by blue (good) and black (bad). Decisions Roles and responsibilities Decisions sometimes take months, from the point they are initially raised to the point that a final decision is made and implementation commences The people making decisions and taking actions are always those who are most likely to get the best outcome, have sufficient time available to act quickly (when appropriate) and are most cost-efficient We often discuss the same issue at a number of meetings, either because a decision was not reached the first time or new information is to be considered Decisions and actions sometimes touch more people than is really necessary (including trustees, employer and advisers), including people who don t contribute much to the decision There are frequently items on agendas that do not need any decision to be taken Individuals often focus their time on the agenda items that they find most interesting and not necessarily because they are key priorities Aon Hewitt 5

6 Opportunities There are so many things that need to be on a meeting agenda, that it is often difficult to find enough time at short notice to appropriately consider new opportunities without reducing time on (or deferring) other essential items If the buyout market became 10% cheaper 2 days ago and represented a strong opportunity for our scheme then we would know about it by now Projects that we would like to undertake sometimes get deferred because there is not sufficient resource (people and/or money) to deal with them When ideas are rejected, we have a robust process for reconsidering those issues in the future Strategy We have a one year business plan for the pension scheme that has SMART objectives, is more than just a calendar of tasks and meetings and has a strategic focus We have an operational plan that sits alongside our funding plan, and describes how the governance structure of the scheme will change and remain aligned over time 6 Time to Focus on Getting Things Done: Delivering Pensions Stability faster

7 Contacts For more information on the results of our research into the spectrum of effective delivery models, and insight into the range of behavioural biases which can lead to sub-optimal decision-making, then please see our thought piece, Governance: Delivering Pensions Stability Faster. For a copy, contact your usual Aon Hewitt representative or any of the individuals listed below. Paul McGlone Partner +44 (0) paul.mcglone@aonhewitt.com Susan Hoare Principal Consultant +44 (0) susan.hoare@aonhewitt.com About Aon Hewitt Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is a global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit: aonhewitt.com Follow Aon Hewitt on Sign up for News Alerts:

8 About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Registered Office: The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN aon.com Risk. Reinsurance. Human Resources.