Trustees warned of ‘turbulent waters ahead’ as regulation and guidance evolves

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LCP is urging trustees not to underestimate the challenges of climate change regulation, as their new survey of DB schemes highlights that over a quarter are only aiming to achieve minimum compliance with new rules.

LCP’s annual “Chart Your Own Course” report analyses the experience of DB pension schemes over the past year via a market survey and analysis from the data of schemes that LCP advises.

29% of those asked about their approach to climate change regulations said that minimum compliance is their aim, with only 5% aiming to be market leading. While the survey shows that nearly half of schemes do already allow for climate change risks on the employer covenant, some 40% do not. (with the remainder believing it is not relevant for them).

These findings are despite the Pension Schemes Act bringing in specific requirements for larger schemes to enhance their climate governance. Overall, the majority of schemes asked expected there to be little impact on the operation of their pension scheme across all the new requirements in the Pension Schemes Act.

LCP’s warning against complacency comes in light of the surprisingly benign impact that the pandemic has had on scheme funding. The typical scheme is around 5% ahead in funding terms compared to pre-Covid levels. Whilst half of that comes from additional contributions, the overall improvement also reflects the robust risk management controls many schemes already had in place.

Other key findings include:

  • 84% of schemes now have a long-term funding target in place – up from around 75% in last year’s survey, with 29% expecting to achieve their target within five years. 
  • The majority of schemes surveyed said that the pandemic had had no impact or even a favourable one on all aspects of their scheme, with 29% saying there was a positive impact on funding and investments.
  • Both interest rate and inflation hedging levels have increased over the year (the average levels for both are 82% compared to pre—pandemic levels of 75% for interest rate hedging and 71% for inflation hedging).     
  • Around a third of schemes surveyed said that their number one priority for the year ahead was considering their long-term funding target framework, and around a fifth said it was to sort data and benefits including GMP.
  • There is a continuing trend for using contingent funding. 44% of schemes have some form of contingent funding in place already.   
  • Very few schemes have updated their mortality assumption in light of Covid-19, with 97% of respondents maintaining their current assumption, at least for now.
  • 95% of the schemes surveyed stated that the pandemic either had a positive impact on or had made no change to their approach to governance and decision making.
  • 64% of schemes surveyed are expecting some impact from new governance requirements and the need for trustees to have in place an effective system of governance (ESOG), with 18% expecting a significant impact. 
  • More schemes are expecting to use a Bespoke approach to be in line with the Regulator’s new funding regime – 40% compared with 19% last year. Compared to the 2020 survey responses, there was a 15% reduction in the number of schemes who believe it is too early to tell.

Jill Ampleford, Partner and author of the report, commented:

“Our analysis reveals that many schemes are overwhelmed by the number of issues to consider over the coming year, particularly around data and governance. Trustees are having to work hard to think strategically and are focused on agreeing and maintaining a viable long-term funding plan.”

Mary Spencer, Partner and author of the report, added:

“Pension schemes may be breathing a sigh of relief that they appear to be reaching safe harbour post pandemic. While the best prepared schemes are already on top of climate and regulatory risk there are some that are not. They can’t afford to ignore the potentially turbulent waters ahead if climate related risks aren’t put at the top of the agenda. Climate regulation is an accelerating force and pension schemes will be left behind the curve unless they make significant changes.”

Chart your own course

Chart your own course

Shifting gears

This report gives trustees the tools to set and navigate a DB scheme’s strategic journey plan in the light of the latest developments in the DB landscape.

Read the report