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Article | Pensions Briefing

Pensions in 2020 – five big things

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

By Rash Bhabra | January 14, 2020

As we dive head first into 2020 we look forward to another year of change. Rash Bhabra, Head of Retirement, discusses his top five areas of focus for a successful year ahead.

For the Bhabra household, the mathematics of two family birthdays in the first three days of January implies a prolonged period of indulgence and a late start with New Year’s resolutions. So last Monday, my first day back in the office, was particularly painful, with body and mind only just beginning the process of acclimatising to a low food environment. When, later that day, a pedestrian overtook me while I was on my first “run” of the decade, I knew that it was time to spring back to life.

But the benefits of a good break should not be underestimated – fast forward a week, and the adrenalin has really kicked in, and things are in full flow. All round, I see colleagues and clients refreshed and full of zest. Even the Government has been fast out of the blocks with an “oven ready” Pension Schemes Bill. So, if you too are all set now for an action packed 2020, where should you channel your energy? Well, here’s my top five, in no particular order!

Get ahead of the game on changes to the funding regime – and help avoid too much prescription

Steered by the Government, most of the attention on the Pension Schemes Bill has focused on new Collective Defined Contribution (CDC) schemes, Pension Dashboards and the headline-grabbing threat of jail for bosses whose conduct puts members’ accrued DB pensions at risk.

Important as these all are, the measures of greatest interest to most schemes will be the changes to the scheme-specific funding framework. That framework has been with us for 15 years and, while there have been failures, it has done a better job – in more challenging circumstances - than the more rigid regime it replaced.

We have a good idea of how the Pensions Regulator would like to see the new regime working. Many of its thoughts are sensible, and it makes sense to root funding agreements in long-term objectives. Trustees and companies should examine the likely implications for them; this is one area where it is sensible to be ahead of the game.

The Bill empowers the Government to prescribe principles to be followed when formulating long-term strategies and when agreeing deficit recovery plans. We don’t think the intention is to be as prescriptive as the Bill would permit, but there is a risk of too much prescription through the back door, to the detriment of a regime that is largely working.

We should therefore all prepare to engage with a consultation on the details, to avoid the risk of being shoehorned into structures that don’t quite work.

New Year, new type of pension scheme: look at CDC with an open mind

In 2018, Royal Mail (a client of Willis Towers Watson) agreed with its workforce to introduce a somewhat different type of pension scheme – Collective DC.

Like with a conventional individual DC scheme, CDC fixes the cost to the employer, so that deficit contributions will never have to be made. But unlike with individual DC savers going into drawdown, longevity risk is shared between CDC members so that each member can have a regular income for life. Unlike with DC savers purchasing annuities, risk sharing across generations allows return-seeking investments to be held for longer, boosting expected retirement incomes. And unlike with DC savers in the accumulation stage or drawdown, there are no investment choices for members to grapple with.

The snag for Royal Mail was that the law did not sanction CDC. The Pension Schemes Bill aims to change that. We are proud of the work we have done with Royal Mail, in helping make CDC a reality. Whilst it remains to be seen how much traction CDC will gain, the more people hear about it, the more interesting they find it. I urge employers to consider CDC with an open mind, considering what is best for their workforce.

De-risking transactions – be ready to lock in strong asset performance

New bulk annuity transactions completed in 2019 covered a whopping £40bn of liabilities, smashing the £28bn record set a year earlier and underlining how mainstream insuring pension benefits has become.

This was driven not by more transactions - the number actually fell - but by an increase in their size, with nine transactions of £1bn or more. Some of the pent-up demand for mega-sized deals has now been satisfied. That may lead to a smaller headline number in 2020 but with schemes eyeing smaller transactions finding it easier to get a look in. Providers who retain a strong appetite to take on pension risk may have to take a more tapas-style approach, with more, smaller, plates.

Schemes wondering when a decade-long bull market might end may want to ask whether now is the time to buy the ultimate matching asset. Larger schemes should consider partnering with insurers to find optimal assets to match their liabilities; smaller schemes can look towards streamlining processes, with good preparation, governance and pre-agreed legal terms.

They can do this knowing that pricing remains attractive – schemes should generally be able to swap a portfolio of gilts matching pensioner liabilities for an annuity contract at no additional cost to the sponsor, and often with a saving.

DC – ask: Is a Master Trust right for you? And, if not, why not?

The Regulator has consistently stated that there are too many DC schemes and has questioned whether Trustees are doing a good enough job for their members. Their research suggests that only 4% of micro DC schemes and 1% of small DC schemes meet all of its governance standards (larger schemes do better, meaning that 71% of all members are in fully compliant schemes).

More broadly, the longer it is since a firm’s DB scheme closed, the bigger the role that DC pensions will play in employees’ retirement plans. Meanwhile, pension freedom makes the choices that savers must navigate more complicated. The question for employers has therefore been whether to help their own scheme raise its game or outsource their pension provision. New Master Trusts have offered economies of scale, professionalism and expertise.

The master trust industry is now properly regulated, and the providers are authorised, including our very own LifeSight – which we are proud to say was the first to achieve this accreditation. This has allowed LifeSight to bring innovation to the sector, including through effective member communications and making ESG part of the default fund, and we expect others to follow suit this year.

Master Trust will not be the right answer for everyone but we expect outsourcing to continue apace. Employers should pose the question – would a Master Trust be a better vehicle for my workforce? If the answer is no, be clear about what your scheme has that a Master Trust doesn’t.

‘GMP Equalisation’ – make 2020 the year of progress

2020 will mark the 30th anniversary of the Barber judgment. And, thanks to the 2018 Lloyds case, the effects of the Barber judgment continue to have a profound impact on the pensions industry, with the focus now on the differences arising from the calculation of Guaranteed Minimum Pensions.

Much as I would prefer to avoid mentioning GMPs in my first ever blog, it is hard not to. GMP work threatens to dominate the workload of many pension schemes in 2020. However, after such a long period of uncertainty, the industry needs to show a sense of urgency and get benefits equalised. We also need to tread carefully enough to get it right first time, making sure that the start of the 2020s really does see GMPs sorted once and for all.


Rash Bhabra
Head of Retirement

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