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2014: Crunch time?

Written by David Adams
January 2014

David Adams predicts what topics will be making headlines throughout 2014

At the start of any year there’s something in the air that suggests to an optimist the possibility of a fresh start – but to pessimists a feeling of gloom: the same old cycle of dashed hopes and dreams is starting all over again. Which of these attitudes will be most apt for the UK pensions industry in 2014?

Auto-enrolment

The major pensions story likely to attract attention in the mainstream media will be the next phase of auto-enrolment (AE), when smaller employers than those already affected (although not yet the very smallest) come into the fold.

“Thirty-thousand employers are due to enrol in the first half of the year and the pensions industry will not be able to cope,” warns Barnett Waddingham consultant Malcolm McLean. “We may have a late surge of people enrolling in Nest, and maybe intervention by the regulator.”

Buck Consultants principal Marcus Hurd has similar concerns. Smaller companies are less likely to have made adequate preparations for AE, he suggests. “When they get round to doing something about it they’re going to want a cheap solution, but the market could by then be at capacity,” he says. “We’ve already started seeing commoditised products, where service providers are teaming up with insurers. But for smaller companies even small fees are perhaps going to seem too large.”

Yet while some service providers may find this end of the market less enticing than working with larger employers, Pinsent Masons legal director in the pensions group Simon Tyler believes new entrants – IFAs, accountants and payroll providers – will step in to help.

One factor that may play a role is the possibility of a cap on charges for AE schemes. It is possible such a cap – presumably set at 0.75 or 1 per cent – may be introduced during 2014. This would put off some providers. There are also concerns that some might raise cheaper charges to line up with the cap.

Whether or not this happens, McLean thinks it likely that employee opt-out rates will rise, in part because while the larger employers already working through AE are likely to have in-house HR departments to help staff understand the process, this will certainly not be the case for smaller employers. Aries Pensions director Ian Neale believes more of these employers will try to dodge AE obligations to avoid paying for advice for their employees.

De-risking

Elsewhere, 2014 will probably prove eventful for many DB schemes. The trend to plan for, if not necessarily execute, de-risking may be affected by the improving funding position of many schemes, suggests professor of pension economics at Cass Business School, City University and director of the Pensions Institute, Dr David Blake. “When they see the full costs will schemes go to buyout?” he asks. “The move to buyout might actually take much longer than most people were thinking only 18 months ago.”

Legislation

Another big story could be the further development of the defined ambition (DA) pension concept. “The DA debate now has some momentum behind it,” says Cardano UK CEO Kerrin Rosenberg. “We may not actually see any DA schemes launched in 2014, but I think we will see enabling legislation and some real life designs start to take shape.”

One piece of legislation we will definitely see is the 2014 Pensions Bill, which should receive Royal Assent in the spring. It contains provisions supporting implementation of a single tier state pension system from 2016, ending contracting out; a framework for regular reviews of the state pension age, already set to rise to 67 from 2026; and introduction of a framework for automatic pot follows member arrangements.

The appearance on the horizon of the 2015 general election will also surely influence the prioritisation of further legislation and the formulation of policy during 2014. This may also be the last full year during which Steve Webb is minister for pensions.

He has certainly made his mark, says Neale. “The industry has a lot of respect for him: the debates he’s opened up needed to be had,” he says. “The question is whether he’s trying to go too fast and do too much at once; and there is some uncertainty about whether he fully understands the consequences of some of the proposals that he’s making.”

But other issues relating to pensions may receive little attention before the 2015 election because they carry too much political risk, such as funding of residential care for the elderly. There are also unanswered questions around public sector schemes: one idea that may get more of an airing in 2014 is mergers between local authority schemes to create huge funds capable of investing in infrastructure projects.

NAPF head of policy and advocacy Helen Forrest says her organisation will continue to engage with all the main political parties during 2014, to try to maintain the (near complete) cross-party consensus on the subject. But she also highlights another, potentially seismic, political event that will happen in 2014: the Scottish independence referendum in September. Independence for Scotland still looks an unlikely outcome at present, but it would have huge implications for the future and short-term administration and funding of many UK schemes.

In the meantime, regulation remains an ever-changing challenge for most schemes. The full consequences of various pieces of European regulation affecting schemes or service providers, such as the European Market Infrastructure Regulation (EMIR), will become clearer during 2014. In the UK, The Pensions Regulator is working with bodies such as the Pensions Administration Standards Authority (PASA) and the NAPF to fine-tune new regulations, such as a code of practice for transfers between providers with the former, and the implications of employer growth with the latter. A new code of practice for occupational DC trust-based schemes is coming into force, while contract-based schemes also face tougher internal governance requirements.

Investment

Another theme in pension scheme governance, identified by Rosenberg, is the continued growth in the use of fiduciary management (FM) services. “It’s on the agenda in small and medium-sized pension funds – by which I mean those managing below £500 million or £600 million,” he says. “Trustees are asking whether they have the resources to manage the pension fund themselves and it’s getting harder to find people within the company to be trustees – more schemes are closed, so the number of active and engaged employee members is shrinking. More companies and trustees are looking for a professionally managed solution. It’s only a matter of time before larger pension funds start taking that idea more seriously.”

It is difficult to make meaningful predictions about investment trends, as the shape and type of pension scheme vary so much. But it is fair to say those trends will be informed to some extent by improvements many schemes enjoyed in funding levels during 2013.

“Clients are de-risking as their funding position improves, moving out of volatile asset classes,” says Insight Investment head of client relationship management Paul Bourdon. “Clients may be increasing their hedge against adverse moves in interest rates and/or inflation.”

He notes the challenges faced by schemes with big deficits, seeking to pay pensions out of investment returns: they will need to move beyond a cash or bond based approach, using other asset types such as commercial property loans to enhance returns. He also points to a continuing trend to withdraw from equities in favour of vehicles such as diversified growth products, which can provide similar returns with less volatility.

But even if the investment strategy is beautifully conceived there are reasons to be cautious, warns Bourdon. “There’s still too much debt in the world, whether in the form of government borrowing, individuals, or companies,” he says. “That means that we’re not in a stable environment and we’re likely to see more crises.”

In short, as when considering the economy in general, it’s probably fair to say that the best we can hope for from 2014 is some more stability and continued economic political and regulatory progress. Fingers crossed.

David Adams is a freelance journalist

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