Board Advisor, Brightwell
03 / 04 / 2023
Reaching agreement on a valuation outcome between the trustees and the sponsor of a large defined benefit (DB) pension scheme is without doubt a complex and challenging exercise. Theoretically, negotiations come around every three years, but, in reality, there’s barely a chance to draw breath between completing one valuation and preparing for the next.
Adding to the challenge is the fact that the circumstances faced at one valuation can be very different from those prevailing at the prior valuation. You only need to look at the last three years – as we have moved from lockdown to levels of inflation we haven’t seen for over 30 years – to see how quickly things can change.
While the challenges faced at a particular valuation can be very scheme-specific, there are a few practices which we believe, based on the lessons we have learned in supporting BTPS Trustees in negotiating valuations over the last 15 years, can help produce better outcomes particularly when applied over a series of valuations.
Probably the most important factor in securing a good outcome is for all parties to focus on win-win outcomes and being as open as possible upfront on what really matters. Of course, priorities sometimes clash, but often they don’t and can provide some easier wins.
It’s important to seek to make progress over a series of valuations rather than trying to fix everything in one go, working over time to reduce the areas where there is potential for disagreement. This way of thinking helps to clarify the prioritisation of what matters the most to both parties today, whilst ensuring consistency from one valuation to the next and avoiding going over the same ground.
A ‘safe-room’ is an environment where a small number of key people from both sides can discuss ideas openly and work through concepts without committing or ‘losing’ negotiation ground. By using a safe-room it’s easier to openly discuss potential stumbling blocks and solutions. It may take some time for people to build up trust in the concept, but it is well worth the effort.
Take the time to understand what someone means by a particular piece of terminology. It is sometimes the case that a term or phrase, particularly if in common usage, can have different implications for different people. It’s always worth taking the time to understand what is meant or alternatively to move away from using common terms and simply provide a fuller description. A common example of this is the term ‘self-sufficiency’.
If the aim is to strive for win-win outcomes, sometimes innovative solutions need to be considered. This isn’t always easy, but alongside a safe-room approach and ensuring that all parties understand what’s trying to be achieved, it can help produce a lasting win-win outcome.
Although this means the gap between finishing one valuation and starting the next shrinks even further, it affords significant benefits in terms of a shared view of what the parties are trying to achieve and why.
Don’t forget to keep building the relationship with key parties at all times, not just when you are negotiating a valuation. This will make negotiation discussions far easier.
Be willing to challenge when the first reaction to something new is to say, ‘you can’t do that’ or ‘that will never work’. Keep an open mind, particularly in safe-room discussions or when working on a new approach, and don’t close a potential avenue down too early.
Have clear agreed plans for escalation if negotiations get bogged down, preferably incorporating more than one level of escalation.
Not directly related to a valuation, but nonetheless worth including in our top 10, is having an investment strategy which is both based on the fundamental needs of the scheme and consistent with its funding objectives. This makes it easier for everyone to get behind the investment strategy, which of course underpins the valuation.
Board Advisor, Brightwell
03 / 04 / 2023
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