Trustee negotiation need not always result in a winner and a loser

Preparation is crucial

As Alexander Graham Bell once said: “Before anything else, preparation is the key to success.” He may be better known for his contribution to telephony than pensions, but his words remain true today, even if telephones have evolved somewhat since their invention some 140 years ago.

First, it is essential to take some time to understand the context for the negotiations. Among other things, this includes the balance of powers under the trust deed and rules, the results of previous valuations, the strength of the employer’s covenant and even the potential interest of the Pensions Regulator if negotiations are not going smoothly.

It is also important to be clear on the trustees’ objectives, most fundamentally to ensure all members receive their benefits as they fall due. This preparation can usefully be supported by the scheme’s advisers.

At the same time, the employer will have its own concerns, with likely emphasis on the amount and volatility of future pension costs.

It is helpful for the trustees to put themselves into the employer’s shoes and to consider the position of the other side in the negotiations. In some cases, the employer representatives may only have limited scope to make decisions. They may also feel under pressure from the powers that be, for example, when part of a large group of companies.

While trustees should be robust in defence of members’ interests, it is important to remember that negotiation need not always result in a winner and a loser. In some cases, there may be areas that are of more importance to the employer that you can ‘concede’ in return for something of value to the trustees.

For example, where an employer has a strong case that increasing cash payments in the near future would be detrimental to its longer-term prospects, some sort of contingent guarantee may provide comfort to the trustees in the interim.

As this example highlights, trustees should remember that there are several levers to pull. As well as the timing and quantum of any recovery plan, issues such as investment strategy, the underlying valuation assumptions and contingent guarantees could all be in the mix.

This is one of the areas where trustees can get valuable input from their professional advisers. More broadly, it is important for the trustees to consider how to mitigate potential downside risks.

Identify conflicts

A further consideration is the importance of identifying any potential conflicts. This can be a particular issue for employer-nominated trustees and even member-nominated trustees who work for the employer, depending on their role.

In some cases, conflicts may best be managed by certain trustees not participating in the negotiations. Having an independent trustee can also be helpful. Either way, it is important to monitor conflicts regularly. It may even be appropriate to take legal advice in more complicated cases.

Finally, it is usually advisable to engage with the employer early, even before the date of the valuation. Agreeing a clear timetable of meetings and information sharing helps ensure that people are available when needed.

It should also increase the likelihood that negotiations go smoothly and that a recovery plan can be submitted in good time to meet the deadline of 15 months from the date of the actuarial valuation.

Negotiating can be a daunting task for those who do not have to do it on a regular basis, but taking the time to prepare thoroughly is crucial, even in this age of instant communications.

Action Points

  • Prepare thoroughly before the negotiations start
  • Consider the priorities and pressures facing the other party
  • Identify the range of different factors that can be negotiated

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Edward Levy


London, UK

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