Pension scheme sponsors urged to prepare for regulatory 'tsunami'

Corporate sponsors may need to develop strategies to deal with the “tsunami” of upcoming regulatory changes for pension schemes, according to a report from Lane Clark and Peacock (LCP).

The report, which is LCP’s third annual report into pensions issues for corporate sponsors, said schemes needed to work out if the changes were material enough to warrant the formulation of a new strategy and recommended “an audit of the changes that are coming down the track”.

These changes include a shake-up of defined benefit (DB) pension scheme funding from The Pensions Regulator, providing data for the proposed pensions dashboards, criminal sanctions included in the Pension Schemes Bill and inflation reforms.

LCP partner and former Pensions Minister, Steve Webb, commented: “Most companies would prefer to concentrate on the day job and leave pensions to those who understand these things. This may be especially true where the pension scheme is closed and many or most of the members have little connection with the firm any more.

“But the tsunami of changes to pensions regulation and legislation that we discuss in this report can have multi-million pound impacts on sponsors and can be hugely significant to the financial position of your firm in both the short and long term.”

The report added that, with new regulatory changes on the way, many pension schemes will find themselves with shorter time horizons and would therefore find the importance of squeezing out extra returns and managing risks to have increased.

In this spirit, the report listed five ‘do’s and don’ts’, which included recommendations to avoid tying up too much capital in hedging strategies, to avoid overpaying on governance and management costs and to get ahead of the pack on climate-based risks.

LCP further recommended its checklist for sponsors to make sure that all risks and opportunities were being considered with regards to short-term and long-term plans.

This checklist, an action plan for companies managing the impact of Covid-19, prioritised business continuity, helping employees understand impacts, taking opportunities and quantifying financial impacts.

LCP head of corporate consulting, Gordon Watchorn, said: “Many sponsors and schemes are in a hugely different place today to where they were at the start of 2020.

“Add in the raft of legislative changes and it is crucial that companies now revisit their pensions strategies and take a proactive approach to implementing a journey plan which considers their corporate objectives and risk tolerance.”

LCP partner, Phil Cuddeford, commented: “Reviewing the long-term pension strategy, prioritising projects, and proactive involvement on the scheme investment strategy are three key steps that every company should take to be on top of recent developments.”

Regarding long-term targets, the report noted that “innovative products”, including “DB consolidators, 2 new products from L&G and other capital-backed solutions”, mean that transferring to an insurer is no longer the only way for DB schemes to settle liabilities.

LCP senior consultant, Sarah Lossin, said: “I am very eager to see the first DB consolidator deals finally take place and to see how this exciting new market evolves over the coming months. It has been a tough year for many and the DB consolidators really do offer something new and innovative which is welcome in these uncertain times.”

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