Pensions Arena

October 2019

Article

bac survey of company actions

Over the autumn of 2019, bac has conducted an extensive survey of the actions which companies are taking to manage their DB and DC pension arrangements.

The companies we surveyed had aggregate pension liabilities in excess of £100 billion. Despite the very different circumstances facing individual companies, the survey reveals a surprisingly consistent picture of the actions which companies are finding most attractive.

Retirement options

Companies are continuing to focus on the two main options which can be introduced at the time when an employed or deferred member retires:

  • a pension increase exchange (PIE) offer
  • a partial or full transfer out of benefits.

Almost all schemes make an explicit assumption within their funding basis for the proportion of members that will exercise the cash commutation option. This principle is now routinely extended to PIE options at retirement (which are usually designed to help improve a scheme’s funding position). The same is not true for transfers, although a small number of companies have told us that their recovery plan includes an allowance for the impact of future transfers out.

These retirement options continue to prove attractive to companies (and easier for trustees to agree) because they do not involve a bulk exercise or a cash injection from the company. Around 75% of the companies we surveyed said they have already or are planning to introduce a PIE option at retirement.

A major focus for companies and trustees is how best to communicate and support members considering retirement options. There is a wide spectrum of support that can be offered and this will affect member take-up. Over 50% of respondents plan to provide some form of member modeller and a panel of IFAs.

“Endgame” planning

A combination of the maturing nature of DB liabilities, good governance and regulatory pressure has meant sponsors and trustees are now considering carefully the strategy and timeframe for running off their DB arrangements. There are essentially three options: continue to run off with the sponsor, transfer to an insurer or work with the new DB consolidators (this final option is still very much in its infancy, but nevertheless is likely to become mainstream over the coming years).

Over 90% of companies surveyed, whether they have an existing long-term strategy or not, are reviewing what the endgame should look like and the implications for investment strategy and member options. In some cases, this is leading to longer term deficit recovery plans (targeting a low risk funding target, rather than technical provisions). These are designed to produce relatively stable cash contributions and are often backed by guarantees and/or asset-backed security.

Alternatives to gilts

About 30% of companies surveyed have either introduced or are at an advanced stage of considering a move away from a “gilts plus” methodology for funding their DB scheme. Alternative funding approaches are focused on having a clear view about how the investments are likely to evolve as the scheme matures and reflecting a prudent view of expected returns, taking into account expected changes in the investment strategy over time.

This is not a straightforward approach to introduce but can be well worth the effort. It requires the trustees and the company to be closely aligned in funding and investment principles and, if necessary, to be willing to present a joinedup position in response to any Pensions Regulator challenge. This approach works best when integrated with a clear “endgame” strategy, as described above.

Insurance solutions

Bulk annuity pricing has never looked more attractive, even for long-duration deferred pensioner liabilities (as for the recent Asda buy-in/buyout with Rothesay Life, in which bac was involved). This has been reflected in the scale of transactions over 2019. Whilst it is unclear whether the volume of transactions will continue to grow in the short term, there is no doubt that demand for bulk annuities will remain strong for many years to come.

Virtually all companies surveyed expect to seek an insurance solution for some or all of their scheme liabilities within the next 10 years (over 50% of respondents are looking at a 5-year timeframe). As a result, companies and trustees are now developing long-term project plans to get their schemes “deal ready”, i.e. data cleansing, benefit audits and adjustments to investment strategy.

Overhaul of risk management

Tougher pension regulation and rising pension costs have meant that pension risk has moved up the corporate agenda. As a result, companies are now far more focused on improving their pension scheme risk metrics and risk monitoring frameworks.

Increasingly, sponsors are taking a much greater interest in trustee risk registers. In particular, companies want to ensure that:

  • they have a clear understanding of how their trustees are assessing and managing risk
  • how the company assesses pension risk is aligned with the trustees’ risk assessment, so they share a common framework and language to manage pension risk.

DC priorities

Companies have told us that they have two key areas of DC focus.

The first concerns how best to improve their governance to meet the increasing complexity and regulatory demands of DC pension provision. Here we are seeing three solutions:

  • the strengthening of DC trustee boards via the use of professional trustees and reviews of advisers
  • the introduction of a company governance committee for contract-based arrangements, in order to provide proper oversight of the DC plan
  • a move to a master trust, possibly combined with a new governance committee.

The second area of focus is how the growing body of retirement experience should influence the design of DC default investment strategies and member communication strategies.

bac has written a number of in-depth articles on the actions covered in this Arena article, so please see our website for more details. Alternatively, if you would like to discuss any of the findings of the survey, please contact a member of the bac team.

Dashboard

Investment returns by asset class

Investment yields

Annual rate of inflation (%)

30/09/2018 31/12/2018 31/03/2019 30/06/2019 30/09/2019
Expected RPI inflation over 20 years
3.52%
3.58%
3.59%
3.55%
3.46%
Index-linked gilts
-1.50%
-1.59%
-1.86%
-1.90%
-2.21%
Fixed interest gilts
1.93%
1.81%
1.54%
1.44%
0.95%
Corporate bonds
2.81%
2.76%
2.36%
2.25%
1.81%

Investment yields

30/09/2018 31/12/2018 31/03/2019 30/06/2019 30/09/2019
Expected RPI inflation over 20 years
3.52%
3.58%
3.59%
3.55%
3.46%
Index-linked gilts
-1.50%
-1.59%
-1.86%
-1.90%
-2.21%
Fixed interest gilts
1.93%
1.81%
1.54%
1.44%
0.95%
Corporate bonds
2.81%
2.76%
2.36%
2.25%
1.81%
  • 30/09/2018    ~   3.52%
  • 31/12/2018    ~    3.58%
  • 31/03/2019    ~    3.59%
  • 30/06/2019    ~    3.55%
  • 30/09/2019    ~    3.46%
  • 30/09/2018    ~   -1.50%
  • 31/12/2018    ~    -1.59%
  • 31/03/2019    ~    -1.86%
  • 30/06/2019    ~    -1.90%
  • 30/09/2019    ~    -2.21%
  • 30/09/2018    ~   1.93%
  • 31/12/2018    ~    1.81%
  • 31/03/2019    ~    1.54%
  • 30/06/2019    ~    1.44%
  • 30/09/2019    ~    0.95%
  • 30/09/2018    ~   2.81%
  • 31/12/2018    ~    2.76%
  • 31/03/2019    ~    2.36%
  • 30/06/2019    ~    2.25%
  • 30/09/2019    ~    1.81%

Annual rate of inflation (%)

Sources for market indices​

  • UK equities: FTSE Actuaries All-Share Index
  • Global equities: FTSE All-World Index (Large/Mid Cap) – in sterling
  • Index-linked gilts: FTSE Actuaries Index-linked Index over 5 years, assuming 5% inflation
  • Fixed interest gilts: FTSE Actuaries Fixed Coupon Index over 15 years (yield is 20 years)
  • Corporate bonds: iBoxx over 15 years AA corporate bond index
  • Expected RPI inflation over 20 years: Bank of England RPI implied inflation spot curve at 20 years (force of interest)
UK equities
FTSE Actuaries All-Share Index
Global equities
FTSE All-World Index (Large/Mid Cap) - in sterling
Index-linked gilts
FTSE Actuaries Index-linked Index over 5 years, assuming 5% inflation
Fixed interest gilts
FTSE Actuaries Fixed Coupon Index over 15 years (yield is 20 years)
Corporate bonds
iBoxx over 15 year AA corporate bond index
Expected RPI inflation over 20 years
Bank of England RPI implied inflation spot curve at 20 years (force of interest)

Almanac

Governance actions

Regulatory

  • When the Regulator gets involved in funding valuations, it is showing a keen interest in the scheme’s risk management framework and routinely asks for copies of the risk register, business plan and IRM framework. You will need to be able to demonstrate that your framework is not just fit-for-purpose, but something which the trustee board uses to manage the scheme’s risks on an ongoing basis.
  • To help prepare for such Regulator involvement, consider running a series of “What if?” scenarios through your IRM framework. As well as providing a helpful training session for trustees, such role play will highlight weaknesses that need to be addressed (it is also helps demonstrate to the Regulator that you are serious about good governance).

Bulk annuities

  • The pricing of bulk annuity contracts, particularly for schemes with a significant proportion of deferred pensioners, is more competitive than many schemes had previously realised. You should ensure that you have an up-to-date assessment of your scheme’s funding position on a buyout basis.

Investment

  • You need to put in place initial objectives for your scheme’s investment consultants by 10 December 2019.

Corporate actions

Bulk annuities

  • The recent series of £bn+ bulk annuity transactions, which has included the buyout of some schemes with a high proportion of deferred members, has highlighted how close many schemes may now be to an insurance solution.
  • This has implications for a company’s overall pension strategy, which may currently be focused on the medium to long term?
  • It could also affect how schemes approach investment opportunities, for example illiquid assets, and preparatory work on data cleansing and a scheme’s benefit specification.

Risk management

  • Do you have a clear understanding of how your trustees are assessing and managing risk?
  • Would it be possible to achieve a common framework and language for managing pension risk between the company and trustees?

Year-end accounting

  • Long-dated corporate bond yields were below 2% pa for the first time at the end of September 2019, which was broadly a full 1% lower than at the end of 2018! Although corporate bond yields moved a little higher in the first few weeks of October 2019, companies with a calendar year-end need to plan for a significantly worse IAS19 position at the end of 2019.

Pension developments/news

Pension developments

July

Future of trusteeship

  • the Regulator launched a consultation asking for views on how to reduce the number of poorly governed pension schemes. It believes that, if trustees cannot meet the required standards, their schemes should be consolidated into better run schemes.

Good practice for DB transfers

  •  PASA launched part one of a DB transfers guide designed to cover straightforward cases. Part two covering more complex cases is due to be published before the end of 2019. The guide is voluntary and designed to improve the overall member experience and efficiency for administrators.

One code to rule them all?

  • the Regulator announced that it will be reviewing its 15 codes of practice with a view to creating a single, shorter code. This will take place over the next year and will focus on the codes that are most affected by recent regulatory change.

August

Investment changes

  • the DWP issued a consultation on its proposed rules to bring into force the CMA’s recommendations for trustees to run tender processes for fiduciary management services and to set objectives for their investment consultants. The Regulator released four draft trustee guides for consultation covering the same areas.

Contingent charging

  • the FCA published a consultation proposing a ban on contingent charging for DB transfers. The proposed rules are expected to come into force in early 2020. The FCA also asked whether all schemes should be required to offer partial transfers?

Retirement outcomes

  • the FCA published the final rules coming out of its Retirement Outcomes Review. These introduce four investment pathways for customers going into non-advised drawdown and require that customers in drawdown products can only be invested in cash if they have made an active choice to do so. They also require annual information on costs and charges to be provided as a single monetary value for customers in decumulation products. These rule changes will come into force on 1 August 2020.

September

RPI to CPIH?

  • the Chancellor announced plans for a consultation in January 2020 on aligning RPI with CPIH. This comes following the UK Statistics Authority’s proposals to reform RPI by bringing the methods of CPIH into it, or to stop publication of RPI altogether. The proposal to change RPI requires the Chancellor’s consent if it is to happen before 2030, but not after that time. A response to the consultation from the Government and UK Statistics Authority will be published before the 2020 Spring Statement.

PPF levies up

  • the PPF launched a consultation on its levy rules for 2020/21. It is not proposing any changes in approach from 2019/20 but its levy estimate is £620 million, which is 8% larger than expected levies in 2019/20.

Pension news

De-risking

  •  HSBC’s UK pension scheme agreed the second largest longevity swap ever, covering some £7 billion of liabilities (more than 20% of the scheme’s total exposure to improvements in longevity). The deal involved a captive solution using an HSBC-owned insurer in Bermuda, before the Prudential Insurance Company of America reinsured the transaction.
  • The GEC 1972 Plan agreed a £4.7 billion buy-in with Rothesay Life, covering the Plan’s 39,000 current and deferred pensioners. The buy-in is expected to convert to a buyout by the end of 2022.
  • British American Tobacco’s UK pension scheme completed a £3.4 billion buy-in with Pension Insurance Corporation, covering the benefits of 10,600 members.
  • The Tate & Lyle Group Pension Scheme secured a £930 million bulk annuity with Legal & General. This covered all the Scheme’s remaining uninsured liabilities, after an earlier £347 million pensioner buy-in with the same insurer in 2012.
  • Phoenix Group announced that it completed a further £1.1 billion buy-in for its own PGL scheme, which covered those members not insured under the previous £1.2 billion buy-in from 2016.
  • The Cadbury Mondelez Pension Fund completed a £520 million buy-in with Rothesay Life, covering 1,900 pensioners.

Funding

  • Thomas Cook’s four DB schemes were expected to enter the PPF assessment period following the firm’s cessation of trading on 23 September 2019. The schemes, whose assets total around £1.4 billion, were reported to have a small surplus on a Section 179 basis, which may mean they can wind up outside of the PPF.
  • The largest of GKN’s two DB plans split into four sections, allocated to separate divisions of the business. This followed the take-over of the firm by the Melrose Group in 2018. Melrose has paid its committed one-off £150 million contribution and is making ongoing annual contributions of £60 million to the two GKN plans.

Plan design

  •  Britvic became the latest company to seek court approval to change its scheme’s indexation from RPI to CPI. Both BT and Barnardo’s failed in their attempts to make this change.