Quickly evolving pensions landscape predicted for 2021

As we enter the new year with another national lockdown, many are feeling a mixture of frustration, unease and cautious optimism as the Covid-19 pandemic rolls on, and the pensions industry is no different.

This year is likely to be one of significant change for the pensions sector, with the introduction of the Pension Schemes Bill, the development of The Pensions Regulator’s (TPR’s) new defined benefit (DB) funding code, sponsor insolvencies and the shifting focus to more climate-aware investing at the top of many professionals’ agendas.

“2020 was a year like no other, and the implications of Covid-19 on health, wealth and jobs will undoubtedly further impact in 2021,” commented Hymans Robertson head of DB pensions, Susan McIlvogue.

“Whilst many of these schemes will fall into the Pension Protection Fund (PPF), we predict that some will go down the new route of commercial consolidation. For schemes with ongoing but weakened covenants, there may be little choice but to lengthen funding plans and implement additional protections.

“Despite the events of 2020, there is growing demand to transfer risk to insurers through buy-ins and buy-outs, and we wouldn’t be surprised to see values exceed £30bn during 2021.”

Aon head of UK retirement policy, Matthew Arends, added: “The economic situation is likely to leave its mark on DB pensions, with rising corporate insolvencies leading to reduced member benefits if the pension scheme cannot afford to buy out full benefits.

“However, I am hopeful that 2021 might see the introduction of legislation for DB consolidators via a second Pension Schemes Bill, enabling superfunds to become ‘PPF+’ vehicles.”

McIlvogue said there was “no doubt” that debate on the Pension Schemes Bill will continue throughout 2021 as supporting regulations emerge to clarify how some of the new provisions will work in practice.

Law firm Linklaters noted several aspects of the bill that will impact trustees and employers this year, including new criminal offences, which TPR is expected to issue guidance on, stronger regulator powers, and DB scheme funding.

Technology platform, Knowa, predicted that 2021 will be the year of “good governance” and will see an increased use of technology, partially driven by the pandemic.

“Where 2020 has been about the fast adoption of technology, 2021 is going to be focused on the efficiency of user friendly technology, which is totally in sync with the trustees specific needs,” said Knowa co-founder, Amédée Levillan.

“For me the interesting thing that the Covid-19 pandemic has shown, is that the pensions industry isn’t slow to evolve, it isn’t full of dinosaurs, it just needs to be presented with innovative technology that makes sense and helps to deliver the best outcome for pension scheme members.”

With the industry evolving with the times, Hymans Robertson co-head of DB investment, Ross Fleming, noted that climate change will be a “key consideration” this year, following 2020’s consultation requiring schemes over £5bn to address climate risk and provide public reporting in line with the TCFD framework.

“There is likely to be an increased focus on managing climate risk effectively and ensuring it is on schemes’ regular agendas for 2021,” he continued.

“Whilst schemes between £1bn and £5bn will have a longer timeframe to prepare for these requirements, we would view 2021 as the year to start getting prepared and ensuring a plan is in place.”

In the defined contribution (DC) pension space, there will likely be “continued development” within responsible investment as the pace for change will “certainly accelerate”, according to Hymans Robertson head of DC consulting, Mark Jaffray.

Commenting on TPR’s upcoming DB funding code, Arends said: “In 2019, TPR initiated the first consultation on the revised DB funding code, and I am hopeful that it will respond positively to the concerns the pensions industry has raised during the process.

“We believe that the requirement for schemes to target their long-term goal by a fixed date (based on that scheme's maturity) places additional burdens on UK companies. This is because they would be asked to underwrite the cost of investment underperformance – potentially at a time when they can least bear it.

“Additionally, bespoke compliance has to be just that, bespoke – not measured relative to the simplistic fast track measure, which is what was trailed in the consultation.”

McIlvogue concluded: “2021 will bring the new and long-awaited funding code from TPR, the biggest shake up in DB funding for over a decade.

“With the second consultation expected next spring at the earliest, trustees and sponsors will be watching for where TPR sets the new fast track parameters. The events of 2020 are likely to influence where TPR sets these parameters and increase the need for sufficient flexibilities in the new code.

“With the economic outlook remaining uncertain and combined with the challenges approaching from RPI reform and Brexit, not to mention GMP equalisation, it will certainly give us lots to navigate in the year ahead, with a foreboding sense that things could get worse before they get better.”

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