This guide is intended to be a useful reference for companies preparing their 31 December 2019 pensions accounting disclosures, whether under FRS 102 or IAS 19.
In this guide, we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.
With the wealth of corporate advisory experience available at Spence, we are well placed to provide you with guidance in how to best manage your pension scheme liabilities.
The implications of the recent developments should be considered to help you avoid any surprises. Spence can help guide companies through these complexities. We have a proven track record in navigating to the best outcomes for our clients.
We would be happy to discuss the options available to you in reaction to the market trends discussed above, including:
How to lock in asset gains.
Decrease future risk.
Reduce funding level volatility.
To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, at email@example.com or by telephone on 0141 331 9984.
clear result of the December 2019 UK general election, 2020 was always going to
be a big year for the pensions regulatory landscape. With the Pension Schemes
Bill working its way through parliament, The Pensions Regulator has also set
out its vision for the remainder of the year. I look at some of these areas
Funding Code for Defined Benefit (DB) Schemes
Consultation on the revised funding code will commence in March (on the principles of funding, with the detail to follow in a further consultation late in the year).
The two main
pillars of the new code are likely to be risk management and long-term funding.
Previous statements from the Regulator have encouraged schemes to set long-term
“secondary” funding objectives and contingency planning. I would expect the
code to give greater clarity to these objectives and turn them into “must
haves” not “nice to haves”.
The new code
will contain two routes for schemes to follow. The “fast-track” route will set
out certain conditions which, if met, will avoid the regulatory scrutiny of the
“bespoke” route. I would expect the fast-track conditions will relate to areas
such as strength of funding target, investment strategy and length of recovery
period. The big question for me will be how many schemes will be able to follow
the fast-track route? If the conditions are too onerous, then it may not do
much to reduce the Regulator’s workload.
– clarity on DC schemes, caution on DB schemes
The future of occupational Defined Contribution (DC) schemes is clear. Further consolidation is inevitable and has widespread support. The days of small to medium DC schemes, and DC sections of hybrid schemes, are numbered.
there is less clarity (or should that be Clara-ty) when it comes to DB
consolidation and DB superfunds. While supportive of the principles of DB
consolidation, the Regulator is “concerned” about separating schemes from their
sponsors and the lack of an authorisation regime.
will continue, especially in schemes with the same sponsors (or sponsors in the
same group) and with “traditional” consolidators. However, to me, the first
deal with the new consolidators does not look any closer than it did this time
governance – “No” to Professional Trustees for every scheme
The big question on the recent consultation into the “Future of trusteeship and governance” was whether or not it should become mandatory in due course for each scheme to engage a professional trustee. The answer for now is “no”, but the Regulator has confirmed its support for professional trusteeship accreditation and an industry code for sole trusteeship.
consultation, the Regulator will also be establishing and leading an industry
working group with the aim of improving diversity and inclusion on trustee
boards. Further consultation will also follow on changes to the Trustee Knowledge
and Understanding code, leading to updates to the Trustee Toolkit in due course.
If you stayed
up late on 31 January you would have witnessed the UK finally leaving the EU. A
moment of history, indeed, but right now it may feel that not much has changed.
Withdrawal Agreement (WA) came into force immediately, but several features of
UK membership of the EU will be maintained during the so-called ‘transition
period’ provided for by the WA (technically, this is not a transition period
but rather a period of negotiation over a trade deal).
basis for negotiations between the UK and EU will now be based on the same
procedures applied for negotiations with other ‘third countries’ (under Article
218 of the Treaty on the Functioning of the EU).
period has been devised as ‘breathing space’ for the UK and the EU to try and negotiate
a new relationship. It will last only until the end of this year (31 December
2020); theoretically, it could be extended but the UK Government has legislated
to stop itself from seeking an extension.
remainder of 2020:
EU rules will continue to apply to the UK;
UK will still be part of the EU single market and customs union;
trade arrangements and rules for travelling within the EU will continue to
jurisdiction of the Court of Justice of the EU will continue as before; and
UK will continue to pay into the EU budget.
however, can no longer take part in EU decision-making and is no longer
represented in the EU institutions. UK representatives can participate in
meetings of EU bodies where discussions are relevant to the UK, but they will
not have a vote.
other arrangements that cease to apply straight away too; for example, UK
citizens resident in EU Member States will lose the right to vote and stand in
local and European elections.
Also, the EU
will be able to exclude the UK from EU activities where participation would
grant the UK access to certain security-related sensitive information. However,
the EU Common Foreign and Security Policy will continue to apply to the UK.
international agreements still apply to the UK during the transition period,
but the UK is now permitted to negotiate and ratify new international
agreements with non-EU countries provided that these do not come into force
before the end of the transition period.
As things stand, the above arrangements will end on 31 December 2020, but with some areas of the UK-EU relationship still covered by the WA, including rights of EU citizens living in the UK and UK citizens living in the EU at the end of the transition period; together with aspects of Northern Ireland’s relationship with the EU.
The nature of
arrangements for other aspects of UK-EU relationship will depend on what is agreed
in the next 322 days (sounds like a lot of time, but remember how long it took
to get to this point!).
financial services perspective, subject to the planned UK / EU free trade
agreement being successfully negotiated (and covering financial services in
line with political declaration), the prospective arrangements will entail:
free trade agreement;
regulatory regime (largely) of the ‘host’ state;
of any EU/UK ‘equivalence’ decisions; and
if any, to smooth the impact of exit from the single market.
KEY POINTS FOR SPONSORS AND TRUSTEES
Most EU pensions law has already
been incorporated into UK legislation and any changes will require further UK
legislation, and the appropriate Parliamentary processes that precede it.
In the meantime, any concerns
over investment strategy, sponsoring employer covenant and the resultant
impact for scheme funding should be monitored as part of a scheme’s
‘integrated risk management’ (IRM).
Want to know more?
This blog is based on a Commons Library Insight article. For more comprehensive information, click on the links below.
reached all-time highs at the beginning of 2020; then came Coronavirus which
caused panic selling in most asset classes due to the adverse impact it could
have on businesses and the global economy.
week the panic seemed to be over, with some major equity markets rallying. This
was particularly evident in the US which posted record highs again, driven by
strong quarterly earnings and growth projections from the world’s largest
companies, in addition to strong US job creation.
It is impossible
to predict the full affect Coronavirus may have on the world economy. The World
Health Organization has declared the epidemic a public health emergency, so Coronavirus
could still cause markets to decline. The future outcome is unknown.
Highs and lows
What I find
most interesting is the volatility it has caused. One example is Tesla, the
electric vehicle manufacturer, which saw its shares increase by around 115% in
2020 only to fall by 15% in one day – its worst day ever. The sudden decline
was driven by reports that Coronavirus would impact production and deliveries
at its factory in China. This highlights the increasingly volatile market.
issuers, 2020 also started off well, with the highest issuance of US high yield
debt in a decade at $37bn – until Coronavirus fears saw investors pull $2.9bn out
of high yield funds. One high profile US high yield ETF saw its asset base
shrink by 7% in a single day – a rapid increase in volatility.
The recent bout
of volatility may be a sign of things to come for 2020. Trustees need to avoid
making decisions based on short-term events and focus instead on their
long-term investment strategy.
Most occupational pension
schemes must provide a regular, usually annual, scheme return to The Pensions
Regulator (TPR), containing prescribed information that, in part, depends on
the type of scheme (DB, DC or Hybrid).
TPR typically issues a
scheme return notice in December for DB schemes, and July for DC schemes.
Schemes must submit their
forms using TPR’s online service, Exchange; trustees can access the online form
only within the period during which they are obliged to complete it. Trustees
must file a scheme return by the date stated on the notice. This will be at
least 28 days after the date the notice was issued but, in practice, TPR aims
to give six weeks to complete the scheme return. That said, it cannot offer any
extension to the deadline.
The information required
in a scheme return is summarised on the TPR’s website, together with a checklist
showing any recent additions to the return.
If trustees fail to
provide a scheme return, they may be liable for a civil penalty of up to £5,000
in the case of an individual and up to £50,000 in other cases.
From 2018, scheme returns needed to include common and conditional (now
known as ‘scheme-specific’) data scores. Common data is the basic information
all schemes need to uniquely identify individual members. Scheme-specific data
is member data that trustees require to enable them to administer their
From 2019, trustees submitting DC returns will be asked to confirm when
they last measured their scheme’s common data and scheme-specific data. This
question has been included to allow TPR to track progress of schemes as they
incorporate the record-keeping standards.
If TPR has concerns that
its record-keeping standards are not being met, it may engage with individual
schemes. If trustees fail to demonstrate they are taking “appropriate steps” to
improve records, TPR may take action.
Data in the spotlight
So, in addition to other
developments where quality of pension scheme data will be under the spotlight,
such as pensions dashboards and addressing inequalities arising from Guaranteed
Minimum Pensions, scheme returns are another example of why, when it comes
to ‘dirty data’, there is increasingly no place to hide.
Welcome to our latest Quarterly Report,
which focuses on the key pension issues and industry developments in the last
three months of 2019.
After almost three years of political
debate and uncertainty, the UK is now entering a new era outside of the EU. As
our investment report highlights, there was relief that a ‘no deal’ Brexit was
avoided at the end of 2019, but schemes should continue to monitor their
investment strategy throughout 2020.
Higher standards of governance,
administration and a focus on data will remain high on the agenda this year, as
evidenced in our articles on the Pensions Ombudsman and The Pensions Regulator.
Looking to the future, we summarise the
main points of the Pension Schemes Bill (CDC schemes, new TPR powers and the
Dashboard). Trustees should also be aware of changes required to their
Statement of Investment Principles later this year, affecting both content and
Our report also features news of the
latest HMRC bulletins, the PPF levy for 2020/2021, mortality trends and the
issue of ‘greenwashing’ in relation to ESG.
We have highlighted any action sponsors and trustees may need to take. Please contact your usual consultant if you need more details on any of the topics featured in this report or have any questions.