3 December 2019
2020 is going to be a really big year for pension scheme sponsors. As the old adage goes, forewarned is forearmed and if you know what’s coming you can mitigate the bad stuff and make the most of the good stuff.
I’ll start with a personal consideration. If I were a company director a priority would be to want to know what exactly it is I might do that could cause the Pensions Regulator (TPR) to give me a criminal record – and fines of up to £1m and jail sentences up to 7 years. The October 2019 Pensions Bill says company directors are liable if there is any “…act or course of conduct that detrimentally affects in a material way the likelihood of … benefits being received”. Crucially this would apply whether you as an individual knew or “ought to have known” about the impact of the action.
So how can you get prepared for 2020? Consider at Board level the impact on pension benefits of any corporate refinancing/restructuring, your dividend policy, and any other issues that you as an individual director might reasonably be expected to know that could impact your scheme. You could also lobby the new government as a Pensions Bill goes through the parliamentary process. My colleague Jonathan Camfield has written a blog with more detail on these new Pensions Regulator powers, which are likely to have a big impact on corporate governance over the coming months.
Early 2020 should bring a consultation on fundamental issues around pension funding and investment. Schemes will have to develop a Long Term Funding Target (LTFT) and a strategy to achieve it. Sponsor agreement will be needed around what the target end point for the company scheme is. This will increase your ability to influence the investment approach and help align pensions to wider corporate risk management strategies.
As part of that consultation we hope to see details on what the new “fast track” (“follow the new prescriptive rules and TPR will stay away”) or “bespoke” regimes will mean. My personal view is that, excluding the large number of very small schemes (say below £10m), most sponsors will prefer the bespoke route to avoid unnecessary calls on capital or loss of flexibility. As a result I expect contingent funding approaches will increase in popularity to enable this.
We’ll also see consultations on the hugely important and material issue of RPI reform. RPI will almost certainly become CPIH by 2030 at the latest (so it will reduce by around 1% a year, lowering future expected pension increases). There is still a lot of uncertainty around what this will mean for balance sheets. Depending on your scheme’s benefits and investments, this change could improve your funding position by up to around 10%, but it could also lead to a 10% worsening (consider benefits that are all based on CPI, which isn’t changing, and assets that are all RPI-linked and so reduce). No one really knows the extent to which this is already factored in to the market pricing of inflation linked bonds and swaps, and whether RPI bond holders will receive any compensation for the change (my expectation is not, but I’m not a lawyer). So how do you adjust your hedging strategy, set your year-end accounting assumptions, and negotiate your upcoming valuation assumptions amidst this uncertainty? What about your terms for transfer values, any pension increase exchange exercise, your GMP equalisation process, your pensioner buy-in initiative? And the list goes on.
As if the above wasn’t enough, 2020 may also see big changes in other areas of the pensions world. Next year we are expecting to see progress on Consolidators, there is the potential for Collective defined contribution schemes to be passed into legislation, and there will be big changes in market practice around member options. There will also be new guidance on GMP conversion, and a court hearing on whether GMP equalisation needs to revisit transfer values already paid out. Your scheme’s Responsible Investment policies are likely to come under increasing scrutiny which could pose risk to your corporate reputation Your scheme’s Responsible Investment policies are likely to come under increasing scrutiny which could pose risk to your corporate reputation. There will also be new Investment Association guidelines on pensions and cash in lieu provided to company directors.
The above issues are all covered in more detail in our corporate report.
Finally, how will the 12 December election change all this? That’s my next blog.