As we say
goodbye to the 2010s and welcome the 2020s, we look back at some of the big
themes that emerged in Defined Benefit (DB) pensions over the past decade.
Much has been
written about low interest rates, might they be here to stay and whether or not
the UK is in the grip of a Japan-like environment? Regardless of the
answers to these questions, it has certainly made the cost of securing pension
income much more expensive, resulting in, amongst other things, significantly
increased liabilities for final salary pension schemes.
This has led
to an increasingly polarised position for DB schemes, with those who hedged
interest rate risk early on now sitting relatively pretty, and those who did
not now finding themselves continuing to stare at deficits, despite record
contributions and one of the longest equity market bull runs in history.
While the low
interest rate environment has led to a corresponding re-rating of asset prices,
driving some of the unprecedented returns seen over the decade, perhaps more
importantly it means lower expected returns looking forward. Consequently,
pension schemes are having to keep their investment strategies under review,
with many choosing to look at more esoteric investment classes and the merits
of a fiduciary approach.
It was the
decade of the equity bull market, with the US S&P 500 index up 28.9% in
2019, its best for some years, contributing to a 190% gain over the
decade. This was led by stocks such as Netflix (up over 4,000%) and Apple
(up over 850%).
home it was a decade of mixed performance. While the Total Return on the
FTSE 100 was 104% (equating to an annualised return of around 7.4%), JD Sports, who weren’t even in the FTSE 100 index at
the start of the decade, ended the period as the top performer, with £1,000
invested in January 2010 worth £33,700 at the end of December 2019.
By contrast, Tesco, with its accounting scandal, numerous profit
warnings, and with the challenge from the German discounters, was the
worst-performing FTSE 100 share over the decade, giving a negative total return
of 21.6%. More generally, the banks and energy stocks largely seemed to
have a tough time in the 2010s.
The rise of member options and de-risking
The number of DB schemes moving inexorably closer to the “end game” has
increased substantially, with many putting in place strategies designed to move
them into a position to fully secure all benefits as soon as reasonably
While this may remain many years away for some, a focus on member
options has come to the fore. Along with the now regulated incentive
exercises, this can perhaps most clearly be seen by the change in options
available at retirement. Beside the traditional retirement options of “pension;
or tax-free cash sum and lower pension” are further choices, commonly a
transfer value or partial transfer value, or an option to exchange pension
increases for additional pension.
In addition, the buy-out market has continued to grow rapidly, with the
second five years of the decade seeing some five times the level of activity
from the first five years, with transactions peaking in 2019 at around £35bn. And,
while the headlines suggest a focus on multi-billion pound deals, there remains
competitive pricing for those smaller schemes who are genuinely ready to
A look back
over the past ten years wouldn’t be complete without mention of pension freedoms. The
popularity of the member options mentioned above was turbocharged by George
Osborne’s shock Budget announcement of 2014. Gone was the requirement to
take an annuity with your Defined Contribution (DC) pot, replaced with the
“freedom and choice” to do what you want with it, whether to buy the much
talked about Lamborghini or not.
change came a substantial increase in transfer value quotation requests,
particularly from DB members over the age of 55 curious to explore their options. Indeed,
this activity has led to a substantial increases in the amount transferred from
DB schemes, to an annual amount in excess of £20bn. While seen as a
win-win-win (a win for members, who are able to take greater control over their
retirement planning; a win for pension schemes trustees, who see a consequent
improvement in the funding position for their remaining members; and a win for
pension scheme sponsors, who see a reduction in their buy-out liability), DB
pension transfers could represent another “mis-selling scandal”, if not
pensions are reassuringly long-term in nature, the rate of change in
legislation and market developments can often seem to stand in stark contrast.
The coming decade promises continued evolution and change, not least with a new
Pensions Bill expected imminently, a “stronger, tougher regulator”, GMP
equalisation to grapple with, the potential alignment of RPI with CPI, the
possible rise of commercial consolidators and the implications of Brexit to