PLSA AC 2020: DB pension schemes urged to reassess long-term targets

Defined benefit (DB) pension schemes need to review and reassess their long-term targets after the impact of Covid-19, according to Aon head of UK retirement policy, Matthew Arends.

Speaking at the PLSA Annual Conference 2020, Arends said schemes needed to examine whether timescales and targets were achievable, what that meant for investment risk and return, what it meant for contribution levels, and what it meant for planned steps such as annuity purchases.

Arends described the tension between Covid-19 and the DB funding code as a “tug-of-war”, as “on the one hand the funding code is driving towards having a long-term target” and improve funding levels in DB schemes, while the pandemic has been a “setback” for both schemes and employers.

Arends continued: “That presents a real challenge. Where does that leave us if, on the one hand the code is asking us one thing and reality is different, how do we balance those two things? I think where it leaves us is with a need to review the plans that we had in 2019, because whatever they were for the long-term, they actually probably need reassessment.”

He added that looking at new options was “probably the toughest set of decisions for a trustee board to make”, commenting that it was “really difficult” for boards to assess a company’s future and strength.

Looking at the broader trends in the industry as it copes with Covid-19, Arends noted that had been a “gradual” funding recovery since the depths of April, though he caveated that it was unknown what will happen next.

As well as highlighting the need for schemes to look at their long-term plans, Arends added that changes could be made to the DB funding code, although he also backed the idea of a simplified option for compliance with the funding regime.

Firstly, Arends stated changes could be made to The Pensions Regulator’s explicit statement that the regulator would measure bespoke compliance by reference to fast track, noting that, if unchanged, this could create difficulties for pensions which were “doing more tailored things to their own situations” and would mean that complexity in pension schemes would not “square well”.

He also suggested that security-led alternative financing did not fit well with the funding code, noting that schemes would “not get any credit” in funding code consultations for this kind of alternative financing.

Arends also noted that contribution alternatives did not get recognised well in the funding regime either, leading for him to call for the regulator to “amend the law so that alternative financing is recognised properly within the funding regime”.

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