As the year draws to an end, I find myself reflecting on a strange 12 months for pensions; with a bit of planning blight in terms of substantive new law and policy, due to Brexit, but still several important developments. My main take-aways are as follows:
Those who can see the hills are running for them
Risk transfers, i.e. buy-ins and buy-outs for defined benefit pension schemes, are inexorably rising. The amount of assets transferred to insurers has broadly doubled year-on-year over the last three years and is expected to exceed £40 billion by the year end. 2019 has been notable for several mega-deals; e.g. National Grid, Telent and Rolls Royce.B
For well-funded schemes which have taken financial risks off the table, there is very little upside in continuing when an exit route is affordable. After all, securing benefits with an insurer represents “job done” for trustees and sponsors.
While doubling again in 2020 seems unlikely, it is clear that risk transfers will provide some major pension stories over the next twelve months.
The need for member engagement is growing
As schemes mature, the proportion of members in the retirement “zone” (currently 55+) is rising and more and more members are seeking regular quotations of their benefits. Also, a recent survey by the Office for National Statistics indicated that pensions has overtaken household property to become the largest component of household wealth. For many schemes I am involved in, the average value of a member’s benefit is often in excess of £100,000.
So, how do members take the important decisions around their retirement? For me, access to timely, accurate and understandable information is of key importance. Technology is developing all the time and members can now do much better than the “paper-only” methods of old.
I also think the tide is turning on “accessibility to advice” for pension scheme members. Trustees have historically shied away from having “on tap” advice available to members, but there is a growing recognition that a member adviser is a useful addition the suite of scheme advisers.
Another topical issue, which is unlikely to go away any time soon, is whether trustees should offer their defined benefit pension scheme members a ‘partial’ transfer option – allowing them to retain some of the guarantees associated with DB pensions whilst also having complete freedom and choice over the part of their benefits they transfer to the own personal arrangement.
CMA review and ESG has increased documentation, but what else will it change?
There were some much talked-about changes brought in following the Competition and Market Authority’s review of the investment consultancy and fiduciary management industry. Investment consultants now need to have objectives set for them by trustees and fiduciary mandates need a one-time open market tender (if not done already).
Environmental, Social and Governance (ESG) issues were also a hot topic and, with further changes still to take effect and the ‘Greta Thunberg effect’, will continue to be so.
All schemes should have updated their Statement of Investment Principles to set out their policy on ESG matters. Investment managers were also falling over themselves to extol their “green” credentials.
Time will tell how much change will come about as a result - so far, there has been a lot of box-ticking.
The Regulator is sharpening its stick
With Parliament being somewhat “distracted” for most of the year, there was little progress on pension regulatory matters. The long-awaited Pensions Bill made it into not one, but two, Queen’s speeches and looks all set to progress next year. The Bill will include, amongst other things, greater powers for The Pensions Regulator and possible jail sentences for reckless employers who fail to look after pension schemes.
Consultation on the new defined benefit scheme funding code is expected early in 2020. It is likely to involve ramping up the pressure on under-funded schemes, seeking shorter recovery plans, more conservative investment strategies for maturing schemes, avoiding “covenant leakage” and the development of longer-term “end-game” plans for all schemes.
The time for talking about GMP equalisation is over
And, finally, a “current issues” article on defined benefit pensions would not be complete without some comment on GMP equalisation (GMP-E). We (and I should really say I) have gone through the eye-rolling, the denial, the “wait and see” and the “mañana”. Time is up for all of these approaches and work really needs to start in earnest in sorting out the relevant data and amending the member benefits.
Look out for the HMRC guidance due to be published in January.
Given the levels of fees that some service providers are quoting for GMP-E work, it will also be interesting to see whether some trustees put projects out to tender rather than just telling the incumbent advisers to get on with it.