January 2011

By Nick Martindale

Nick Martindale asks what 2011 has in store for pension professionals

After all the excitement of the last few years, pension profes-sionals may be looking forward to the prospect of a more sedate year in 2011, on the back of a gradual if unspectacular economic recovery. That's not to say, though, that there aren't issues that need to be addressed or uncertainties that are worthy of flagging up in what could yet turn out to be another challenging 12 months.

From an investment perspective, we may be in for more of the same, suggests Richard Urwin, chief economist within BlackRock's multi-asset client solutions group. He predicts rising equity prices on the back of modest rather than massive growth in emerging markets fuelled by currency appreciation, as well as further gains in commodities as the supply/demand imbalance persists.

"The most marked difference in returns from 2010 could emerge in the sovereign debt market, with the headwind of very low yields," he suggests. "While diversification into corporate bonds and other non-government debt could add value, the scope for material spread narrowing is more limited. In short, 2011 could be another year where many investors find it difficult to take risk. It is, however, likely to pay off."

As some kind of normality returns to the economy and more defined benefit schemes return to balance, this mantra of reducing risk is likely to become more prominent, suggests James Walsh, senior policy adviser at the National Association of Pension Funds (NAPF).

"Some sponsors will be thinking about what they can do to reduce their pension risk before the next economic downturn, whenever that might be," he says. "We can expect the pensions press to be full of debate about buyouts, longevity swaps and other forms of de-risking."

Deborah Cooper, a partner at Mercer and lead of the company's Retirement Resource Group, says some trustees are already pursuing such a policy, often with the encouragement of employers. "They retain risk-seeking assets, but give their investment manager a mandate so that as funding levels improve the portfolio moves into less risky investments," she says.

"The strategy would also generally include steps to protect against asset falls, including derivative strategies. Sometimes, particularly if the scheme is closed to future accrual, this is pursued as part of a strategy to get the scheme to become self-sufficient so it can provide benefits without necessarily relying on the employer for future contributions."

Marian Elliott, director at pensions consultancy Atkin & Co, agrees. "Inflation hedging will be on the agenda as schemes seek out real growth but reduced volatility," she says. Changes to the way in which the pension protection levy is calculated will also encourage a move towards less volatile assets, she adds.

Numerous other developments also mean 2011 will be a time for organisations to take stock of their pension schemes, suggests Cooper. "The Retail Prices Index (RPI)/Consumer Prices Index (CPI) change, the change to default retirement ages, auto-enrolment and the end of contracting out on a defined contribution basis all provide opportunities for employers to review their schemes and consider whether the benefit structure continues to meet their objectives," she says.

"The Pensions Regulator is also flexing its muscles, encouraging trustees to behave with more circumspect in relation to the employer with regard to issues such as enhanced transfer values and cautiously with respect of funding and asset strategy.

“The Pension Protection Fund is significant here, because of regulator's responsibility to protect it, which to some degree conflicts with the trustees' obligation to include employers' interests as well as members' when determining their strategy towards funding."

The issue of whether defined benefit schemes that are currently linked to the RPI can - or should - move to using the CPI for pension increases is certainly likely to be a big issue in 2011.

Walsh at the NAPF says the government's decision not to legislate in this area has taken some of the heat out of the debate but estimates that around a quarter of such schemes are able to switch, and will face a major challenge in communicating this to their members.

The recent changes to the annual tax-free allowances to contributions that can be made to registered schemes will also have an impact over the coming year and could mean that those on high – or even modest incomes – no longer engage with pension schemes, warns Tim Middleton, technical consultant at the Pensions Management Institute (PMI).

"High earners are the owners and managers of UK businesses and if they come to feel that they no longer have a valuable stake in workplace pensions, they will feel less of an incentive to sponsor such arrangements," he says. "This will result in a great many UK employees with no more pension coverage beyond that required by statute. It could usher in a new culture of more generalised long-term saving via the workplace instead of the traditional pension scheme."

More immediately, employers with a high proportion of high-earners will look to redesign their remuneration packages to reduce the emphasis on pension provision or introduce greater flexibility, says Gary Tansley, senior consultant at pensions consultancy HamishWilson & Co.

"Some schemes will realise they have not done anything to guard against the removal of old Inland Revenue limits from 6 April 2011 and be in a mad panic to get rule amendments made by 5 April," he forecasts.

Trustees may also be forced to amend schemes in line with new legislation regarding the abolition of the default retirement age, which comes into force in October 2011, adds Elliott at Atkin & Co.

"Death-in-service arrangements and late retirement provisions will need to be changed to cope with this," she says.

Another focus for 2011 should be to prepare for the introduction of auto-enrolment in April 2012, says the NAPF's Walsh. "Schemes should already be thinking about how they will comply and review their approach to record-keeping, where the Pensions Regulator can be expected to keep up the pressure for higher standards," he says.

"Defined contribution schemes should keep an eye on the regulator, with a long-awaited policy paper expected to launch a major push on regulation."
The most significant development in Europeans pensions regulation, meanwhile, will be the emergence of the new European Insurance and Occupational Pensions Authority (EIOPA), which launched in Frankfurt at the start of the year. "With around four times as many staff as its predecessor body as well as new powers, EIOPA can be expected to make a real impact on pensions across Europe," says Walsh.

The European Commission is also due to publish a major white paper on pensions in the autumn, he adds, which could set out plans for some form of solvency regime for pensions, together with a review of European pensions law and ideas on tackling members' share of defined contribution risks.

Katie Frost, director at Shilling Communication, believes communi-cating with scheme members will become even more important over the coming year in light of recent and upcoming changes.

A recent survey of pensions managers, trustees and industry professionals suggested the main issues would be educating members about defined contribution schemes as well as more generic attempts to build trust and confidence in pensions.

"Cutting out the jargon and using honest, personal and straightforward language will help to rebuild that trust and develop a stable platform on which you can communicate," she says.

Nick Martindale is a freelance journalist