24 December 2021
2021 was another momentous year, with a lot of activity in the pensions world. It saw the Pension Schemes Act coming into law, which in our view means sponsors of final salary schemes have to consider the pension impact of every business decision. This is the biggest shift in legislation in 15 years and pensions have to be higher on company board agendas. However, the good news is that pension schemes have generally improved funding and risk positions during 2021 and meaningful movement in the superfund market with Clara receiving TPR approval giving more potential end-game solutions (at least I got some of my predictions in last year right…). Here, I once again put on a ‘Company Director’ hat and think what action should I be prioritising for 2022?
I’ll start with a personal consideration. If I were a Company Director a priority for me would be to make sure me and my fellow directors fully understood the implications of Pension Schemes Act 2021, and in particular make sure we have a good process for ensuring the pension scheme is appropriately considered lest we fall foul of the new regulatory powers or criminal offences when making decisions, not just around dividends or large transactions. Record keeping will be more important than ever to protect us should the Pensions Regulator intervene in future. Other points to consider for companies to avoid criminal penalties can be found here.
Given this, in particular, and the need to agree a long-term funding and investment plan with the scheme trustees, I would want to make sure the Company has a prominent role in what the end-game should be, and how best to get there.
Superfunds bring a new option for end-game, and this is a good option if we don’t think we can get to buy-out in a reasonable timeframe. As well as thinking through the different options for end-game, I would want to make sure we weren’t setting the target too high, as I have a number of stakeholders to think about, not just the scheme. The key questions I would ask are:
- Does my scheme profile and our Company support make a superfund a viable target? If not, what are the pros and cons of targeting insured buy-out versus long-term run-off?
- If we target insured buy-out as an end-game, we need to check the trustees’ advisors assumptions are in line with recent market deals. If we’re targeting this in 10 years, is scheme maturity (which reduces the buy-out cost versus all other measures) allowed for?
And in terms of proactively driving the journey plan to get there, I would want to understand initially:
- Are the trustees adopting excessively prudent assumptions? In particular, given excess deaths have been sustained through 2021, despite the large vaccination roll-out, should this be allowed for in how long we expect our scheme members to live?
- Would it be a more efficient use of our company resources to use contingent funding options to reduce prudence or as an alternative to cash payments?
- Which member option exercises would have a meaningful impact?
- What are the key risks and how do we balance that against the expected cash impact of de-risking steps? With inflation on all measures being so high at the moment, do we need to revisit the way we manage inflation risk?
- For the growth assets retained, are they managed in the most efficient and advantageous way? Every £1m extra returns is £1m extra which I can invest in the business, now its not needed by the scheme. We need to ensure consistency on ESG policies between the company and the scheme.
We know now there is a significant delay to the new funding regime and it may be that the first valuations caught won’t be before 31 December 2023, but the funding and investment regulations due to be consulted on in Spring 2022 will be an important milestone for the regulator’s direction of travel and we will be watching that closely.
Clearly there is a lot to think about in the pensions world, and I’ve not even mentioned things like benefit change projects, reviewing governance structures to ensure we are running the scheme efficiently, GMP equalisation, PPF levy management and defined contribution issues and wider financial wellbeing for all employees.
That all said, I can see 2022 being a year of companies taking greater control over the critical next part of the journey towards end-games, and a focus on getting there which is best aligned with our corporate objectives.