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Brexit, the DB funding code and intergenerational inequality: in conversation with an expert panel

Insights from the Pensions and Savings Conference 2019

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Retirement|Pensions Technology

By Emma Palfreyman and Rash Bhabra | December 3, 2019

An expert panel discusses key issues and the latest regulatory developments in pensions.


  • Fiona Frobisher, head of policy, the Pensions Regulator
  • Paul Johnson, director, Institute for Fiscal Studies
  • Rash Bhabra, head of retirement, Willis Towers Watson
  • Emma Palfreyman, senior director, retirement, Willis Towers Watson (chair)

An expert panel discusses the latest regulatory developments in pensions
An expert panel discusses the latest regulatory developments in pensions

Emma Palfreyman (EP): Fiona, could you update us on progress on the new DB funding code?

Fiona Frobisher (FF): I don’t know the extent to which I would describe the new funding code as a change. There is no real fundamental change of direction here. It is about being clear about funding objectives and more transparent around risk-taking. Some of that is being clear about investment strategy, some of it is sharpening up definitions around covenant and contingent security. We would like to be in a situation where we are transparent about what appropriate technical provisions are and setting clear standards, which people can either meet or they can come to us and explain what they want to do and why that is still effective and appropriate, and provide justification for that.

Rash Bhabra (RB): Even if there is no fundamental change to the code itself, it does feel like a toughening of the funding regime. In terms of longer-term funding targets, while they don’t exist from a regulatory perspective, we do have a number of pension schemes where there are similar sorts of things in place. Inevitably where there are more set long-term targets to get there, what we have seen in those situations has been either employers paying more contributions and taking less investment risk, or more of a focus on liability management. If the funding regime does bring in greater prescription, which it feels it may well do, these are the sorts of things we would see happening in practice.

EP: Are there any steps pension funds should be considering now in response to Brexit?

RB: Clearly Brexit creates uncertainty for companies and indeed for markets generally. The two things for me would be, from a trustee point of view, understanding what the implications of Brexit might be on the employer covenant. Second, quite aside from the impact of Brexit on the economy, we are probably overdue a recession. We have had double-digit returns on equities for the last decade. I think both companies and trustees should be taking a step back and having a very careful think about what they are doing in a world with even more uncertainty, where that hasn’t come through into markets. Today, if you are going to continue to take risk, that should be a conscious decision.

Paul Johnson (PJ): We are overdue a recession, but the difference is we might have brought this one on ourselves. If we move into no-deal Brexit territory, we probably won’t see sterling fall quite so far as we saw immediately after the vote to leave the EU, but we will probably see a less positive response in the stock market.

EP: If managing risk is something that pension funds do in the DB world, flipping over into the DC world, it is up to members to manage that uncertainty. How much is it reasonable to expect trustees and sponsors to help them?

FF: It’s a really interesting question and it’s not one we have an answer to as a regulator at the moment. It’s certainly something the new Money Advice Service is looking at. I think people coming up to pension age are being faced with some really important and difficult questions and decisions to make about decumulation. Trustees and sponsors are probably in the best possible place to help them through making these decisions. I think there is a lot of innovation happening and I would like to see more of it. I think duties are going to have to come in – I don’t think we can leave members to their own devices.

EP: Can Collective Defined Contribution (CDC) offer a new future for pensions?

RB: For me, CDC conceptually is a very good idea. We have gone from the employer bearing the risk to the individual. Whether or not it does take off has to be a question mark, because employers in the conversations we are having with them are treading quite carefully.

EP: Given the likelihood of the need to raise taxation, are pensions particularly at risk because of intergenerational inequality?

PJ: We already have raised taxation to a great extent – the lifetime and annual limits have come down dramatically. The limits for DB schemes are massively more generous than for DC schemes and I think it’s extraordinary that this continues. The impact has not hit the older generation, it’s been the younger generation.

RB: Inevitably, the easiest target for raising money through taxes will be pension funds and the well off. So, I think we can probably see a greater risk of pension funds being taxed in some shape or form.

EP: Fiona, the Pensions Regulator has recently consulted on governance, can you share any initial insights?

FF: We have had 160 responses, which is a record! Obviously, we do not want people to jump through hoops for the sake of it, there is a lot of ‘good enough’ governance out there. But some issues around ESG and diversity are not being looked at enough. These issues are not ‘nice to have’, they are relatively central to good governance and reflect the mainstream expectations of the membership.

Another issue, which we didn’t ask about at all, but which came through strongly, is the importance of employers supporting pension schemes and providing the time and funding for people to do this properly and get the training. We need to be bringing employers into it more centrally.

The third issue is that the aspiration to have a professional trustee on each board has been controversial, which we are not entirely surprised by. There was a complete split in views on this.

Oh, and everybody loves the toolkit, which is quite annoying for me because I would quite like to get rid of it. If it is going to stay, it needs to be better and more linked to standards and codes – it will take quite a lot of work to get it up there, but the feedback is we should do that.

EP: The regulator has said that badly run schemes need to improve or consolidate. Can you give us a few thoughts on consolidation in the pensions market?

FF: Consolidation is the way the world is going. Obviously most new scheme members are in DC mastertrusts and that is what we see as the future. If we are looking for better governance, you have to ask yourself, running a smaller scheme, can I provide the level of governance and value that is expected? We are not advocating any mandatory consolidation at the moment, but we are definitely trying to raise the profile of the question: is this the best place for members to be, or should they be in a scheme that offers economies of scale and services that you probably can’t?

Back to Pensions and Savings Conference overview


Emma Palfreyman
Head of Retirement Software Strategy Group

Rash Bhabra
Head of Retirement

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Pensions and Savings Conference 2019 Overview PDF 1.5 MB
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