Reviewed by: Jonathan Seres
Author: Paul Thornton and Donald Fleming
Publisher: Cambridge University Press
ISBN: 9780521761611
Price: £95.00

This book is the first to combine an overview of UK pension schemes in their economic and legal contexts with a focus on the governance role of trustees. To the general reader of the Gazette, advising only occasionally on pension schemes, the chapters of interest are probably those focusing on the economic scenario, but if a legal question does arise, a detailed study of the relevant chapter will set the scene - and probably convince the practitioner to call a specialist.

Similarly a trustee will find a chapter that is relevant to a current project of great value. However, to the pension lawyer, there are nuggets throughout this book, and this review will focus on them.

The editors are an actuary and lawyer, now working together in a corporate finance house advising pension trustees. Their own chapter focuses on the development, for trustees, of the concept of monitoring the financial strength of the employer’s covenant, and the effect of corporate events. The other 17 chapters are written by regulators, actuaries, economists, administrators - and in three cases by practising lawyers, with a brief round-up by the Cambridge University professor of law in the business research centre.

No chapter summarises the overall duties of a pension fund trustee, but the book is none the worse for that - plenty of other works are available, and all the general questions are very well covered on the Pensions Regulator’s website www.thepensionsregulator.gov.uk. Paul Watchman (formerly at Freshfields) comes closest, with a study of the fiduciary duties in the investment context, including a detailed analysis of environmental, social and governance issues. He ends with his own suggestions for law reform and guidance in eight areas. The other ‘legal’ chapters cover employment law aspects and conflicts of interest respectively.

Trustees are, however, well served by the numerous practical comments in the chapter Good trusteeship written by a leading professional trustee (formerly a partner in a leading firm of actuaries, and in this reviewer’s experience a font of wisdom). Guidance is given on the range of skills to seek on the trustee board, the practical aspects of including senior corporate managers and of communications with members. An immensely valuable section is the brief but clear offering for key issues on a trustee’s agenda for defined benefit (DB) schemes. The editors’ chapter on the sponsor’s covenant, mentioned above, includes, for trustees, a bullet point list of questions in the context of the regulatory regime and a practical way forward for the trustee board.

To the pensions expert, there are riveting chapters on capital markets, investment concepts at the highest level (written by the UK’s leading expert), the hedging of risk and the management of longevity risk. Each of these is a long read on its own, but highly rewarding. The first demonstrates market volatility over the last half century, and explains the assessment of bonds versus equities, and the ‘reverse yield gap’. The second focuses on the contribution to investment performance made by trustees’ mission and governance, based on assumptions made from detailed research of high-performing funds, followed by descriptions of risk factors and areas of competitive advantage.

The third is invaluable for trustees of DB schemes and advisers who have previously seen risk attribution reports, and details several scenarios, demonstrated by charts, including a tantalising reference to newly recognised asset classes such as social housing with its long-dated, inflation-linked and relatively safe cash flows - relevant to recently announced infrastructure funds. The fourth gives an excellent picture of the effect on DB schemes of increased life expectancy, noting that a continuation of the trend could add 30% to UK pension scheme liabilities, identifying capital market investors who would have an interest in taking on the risk such as insurers who hold the counter-risk of early payment on existing life policies, or in due course drug companies, nursing homes or even governments, and ending with excellent descriptions of buyouts, buy-ins, longevity pricing structures and the practical management of longevity risk.

Usefully, it is followed by a chapter on the role of insurance, with an expert summary of recent market developments and highly practical considerations relating to buyouts and buy-ins and their pricing processes.

While there is a chapter on defined contribution (DC) investment governance, this reviewer does not see its theoretical ideas as likely to be applied widely. It usefully highlights the reputational risk to employers if pensions were to be disappointing, but its answer is to tailor plans to segments of the membership with periodic surveys, whereas, as other chapters emphasise, key drivers for DC plans are the move away from cost uncertainty and expensive governance. In this reviewer’s experience, the biggest factor in disappointing DC pensions is the low rate of employers’ contributions. However, the chapter’s descriptions of communication strategies, investment labelling, and benefit design and responsibilities, are of considerable value to all the stakeholders of a DC plan.

For both trustees and employers the most refreshing chapter is written by a finance director, no longer at ICI but citing its ground-breaking (and highly publicised) creation, in 2003, of a special purpose vehicle to receive customers’ payments and give a guarantee to the pension plan, that was senior to the intergroup funding that established the vehicle. The chapter also cites the well-publicised Marks & Spencer property vehicle with its collateral tax benefits.

However, the most important aspect of the chapter is its focus on the commercial drivers of employers’ business plans, and the impact on them of long-term pension liabilities. This is described in crisp terms, with charts and checklists, and much debunking of valuation ‘truths’. For lawyers there is a sharp comment on the time taken to document an arrangement that, if it had been a commercial transaction, would have been driven by trade-offs to a speedy conclusion. The thrust of the chapter accepts entirely the responsibilities of trustees, and advises on a transparent approach from the sponsoring employer to ensure that the parties can work together, for example by balancing dividend policy with the pace of pension funding, while at the same time challenging inefficiencies in the pension governance process. The chapter includes a refreshing analysis of the ‘Value at Risk’ (VaR) technique, treating it as a useful tool but with serious flaws, reinforcing comments of authors in earlier chapters.

This is a collection of expert offerings. For those who want to dip in, there is wisdom in each of the chapters. For the trustee or the practitioner who wishes to work through the book, it is highly rewarding, with a flow of insights not to be found elsewhere.

Jonathan Seres is chairman of the International Pensions & Employee Benefits Lawyers Association, and a former senior partner at Sacker & Partners, pension fund lawyers

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