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Financial : Role of Pension Fund Trustees

This page was last updated on 18th April 2008


When I joined the Company in January 1968 my thoughts were understandably more focussed on the recently past 'summer of love' than the issue of pensions and what I might live on when I eventually retired.  All that has changed in recent years, particularly since the beginning of 1997 when I became Chairman of the P&G Pension Fund Trustees.  I had been assured by John Lumsden, the previous Chairman, that the commitment would be 'no more than 3 or 4 meetings per year and one or two nice lunches'!  Of course that was a long way from the truth because the role of the Pension Fund Trustee today is more onerous than ever.

The responsibilities of the Trustees - to ensure that the assets invested on behalf of pensioners are sufficient to continue paying our pension commitments for the foreseeable future - are defined by Parliament, and malpractice is punishable by substantial fine and possibly imprisonment.

The financial pressures on companies of sustaining a defined benefit (final salary) pension scheme have been well-documented in recent years and from July 2003 the P&G Defined Benefit Section was closed to new members.  Anyone joining P&G from the middle of 2003 onwards has been able - if they wish - to join a Defined Contribution (DC) section to which the Company contributes as does the employee.  This scheme allows the employees to accumulate a sum of money which will purchase an annuity at the end of their working life.  Both of these schemes are managed by the same Board of Trustees.

There are currently 11 Trustees and our role is central to the successful operation of the Pension Funds, with our responsibility extending across all areas of its operation.  We have fiduciary responsibility for key areas, particularly investment, and have appointed an Investment Committee - currently chaired by P&G Finance Director, Dermid Strain - to assist in the management of the investment side of the Funds, the crucial area of Trustee responsibility.

The role of P&G as sponsor of the Pension Fund is vital and we work closely with the Company and consult with it on all key issues.  However, whilst the Trustees, who come from a wide range of sites and job background within P&G and include two pensioners, need to work with P&G, we are also legally distanced from the Company.  In certain cases we can act in a way which might not be wholly be as the Company might wish if we believe it to be in the best interests of Fund members and pensioners.  Recent changes in Government legislation on pensions has further strengthened the power of Trustees to act independently from the sponsoring company if they feel it to be in the best interests of Fund members.  Around the Fund we have a series of professional advisors to support Trustee management, including Hewitt Associates Limited (our actuaries), and Dickinson Dees (our legal advisors).

At the core of the Trustee role is the management of the cash in the Funds.  As far as the Final Salary (or Defined benefit - DB) Scheme is concerned, we are ultimately responsible for determining where this will be invested - whether for example in equities, property, fixed interest bonds, etc - and also for assessing the ongoing performance of our Investment Managers.  In the case of the DC Scheme, Trustees are required to make available to members a range of investment options offering a variety of investment returns so that individual needs, which may vary considerably depending on career stage, can be met.  The complexities of today's investment marketplace mean that we are constantly having to assess performance against various benchmarks.  The Fund's assets are mostly managed by Barclay's Global Investors, but we have a number of smaller investments with other companies such as Blackrock and Standard Life.

In establishing the longer term investment strategy for the now closed final salary scheme, Trustees need to establish a balance between growing the value of the Fund against the fact it is now closed and its membership will progressively decline in numbers.  This means that over time the exposure to higher-risk/higher return investments such as equities (shares) will be reduced in favour of investments in lower risk options such as Bonds and Property, which offer reduced returns combined with reduced risk.  Over the last five years the percentage of the final salary scheme invested in equities has been reduced from 85% down to 65%.

Trustees need to take a long-term view of investment performance and we have seen our share of weak as well as strong equity markets in recent years.  The role of the Trustees in determining what is the right balance of investment types over time is a key part of our responsibility.

We are fortunate in P&G that as markets go down and Fund surpluses may decline we can rely on the Company to step in and provide funding support until such time as markets recover and the Fund can sustain itself via investment growth again.  It is important that Trustees and the Company work together in the crucial area of investment management - especially in the context of recent sharp rises in life expectancy, which have placed considerable pressure on the resources of pension funds and the companies that support them.

As the baby-boom generation reaches retirement age it can look forward to more years of active retirement than any other generation in history and the Trustees have to ensure that the Fund delivers on its financial commitments.  As Samuel Butler once remarked, 'it costs a lot of money to die comfortably' and, believe me, nobody knows that better than a Pension Fund Trustee.

Bernard Balderston, Chairman of P&G Pension Fund Trustees

Summer 2018

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