18 December 2020
After a year which no one could have predicted, 2021 is likely to be a year of consolidation and regaining control. From a pension perspective, many schemes have suffered from increasing deficits and/or weakened covenants over 2020. Looking ahead, companies now need to take control of the next steps of the pension journey.
I’ll start with a personal consideration. If I were a Company Director a priority for me would be to understand whether the risks of the pension scheme have changed. Before I agree a journey plan with the scheme’s trustees (which will be required by the imminent Pension Schemes Act 2020), I need to understand what has changed, what remains the same, and ensure that the journey is fully aligned with my wider corporate objectives. LCP’s checklist remains relevant and is a starting point to make sure all risks are considered and all opportunities are investigated.
Late in 2020, we had the confirmation of RPI inflation reform and developments on GMP equalisation. More change lies ahead as we are still waiting to hear from the Pensions Regulator about its revisited parameters for the “Fast Track” approach to complying with the upcoming new funding regime. This will be an interesting development to monitor during 2021 ahead of future valuations, but I expect my company and many others will consider the “bespoke” route to allow more flexibility with how appropriate support and cash contributions are given to schemes – in particular I will investigate whether contingent funding mechanisms which can improve the efficiency of how resources are deployed.
The Pension Schemes Act 2020 requirement to agree a journey plan will give my company greater influence on pension schemes’ investment strategies. By ensuring early engagement, we will make the most of potential opportunities, whilst also avoiding Trustees de-risking unnecessarily quickly which all else equal will increase the cost and cash contributions required to meet long term targets. Crucially, I will make sure that I engage on climate change – getting ahead of the pack on climate risks and opportunities could be a positive action and help reduce any reputational risk (see our short actions to address this live issue).
The Act will also widen the Pensions Regulator’s powers, and I would want to be sure I know exactly what it is I might do that could cause the Pensions Regulator to give me a criminal record, a fine of up to £1m and up to 7 years in jail. I will ensure that we consider at Board level the impact on pension benefits of any corporate refinancing/restructuring, dividend policy, and any other issues that each individual director might reasonably be expected to know that could adversely impact the scheme. After a year of such dramatic changes in fortunes, and needing to react quickly, this will need to be a vital part of our ongoing Board governance going forwards.
With challenges, there is also more need for innovation. I welcome the developments on superfunds and it does feel that we are finally close to seeing real transactions which can improve expected member outcomes. Schemes that were able to move quickly were able to achieve great pricing on insured buy-ins and buy-outs at the peak of credit spreads around the end of Q1, and I expect I will be looking to get my scheme in a position to take advantage of future opportunities. But as well as these potential end-games for schemes, there are products to consider which may lead to the end-game more quickly or with less risk of additional cash being required. We’ve seen capital backed journey plans emerging, as well as new investment products which reduce or remove some of the common risks associated with pension schemes. There is a lot to consider when setting journey plans, but my company needs to be engaged and proactive to ensure our views are reflected.
Clearly there is a lot to think about in the pensions world, and I’ve not even mentioned things like benefit change projects which may be higher on our agenda following any downturn in fortunes, or managing our corporate balance sheet following RPI inflation reform and low discount rates at the end of a hugely volatile year.
That all said, I can see 2021 being a year of consolidation, a strengthening of position, and a focus on positive outcomes and action for companies, like mine, who are well prepared.