Pensions Arena

January 2020

Article

2019 – bumps and small steps

2019 marked 50 years since Neil Armstrong walked on the moon and this was obviously on the Queen’s mind in her Christmas message. Yet the parallel she drew was not of a giant leap forward, but of the importance of small steps! Ever a paragon of restraint, she described 2019 as “bumpy”. In terms of pensions, it certainly felt like a year of small steps with a few bumps thrown in for good measure…

In this article we take a positive look back at 2019, as well as looking forward to some expected pension developments over 2020.

Brexit – one step forward

Of course, 2019 was another year in which Brexit, or rather the lack of progress on Brexit, dominated the political, economic and pension worlds. It was the logjam that stopped very much of anything happening. Boris Johnson’s victory in the December 2019 general election means we now have certainty about the first stage of Brexit. However, the question of what Brexit will turn out to mean in terms of trade deals (soft, hard or no deal at all) is set to run for at least another year.  

Pension Schemes Bill returns

The Conservatives’ election victory also means the resurrection of the Pension Schemes Bill, which had appeared in October 2019 only to disappear when the general election was called. Whilst the precise timing is currently unclear, the Bill has already made its first appearance in the current session of Parliament and will, as previously announced, cover new powers for the Pensions Regulator (TPR), measures needed for the introduction of the pensions dashboard and the framework for the Royal Mail to establish its planned collective DC scheme. One obvious omission from the original Bill was the legislation needed to regulate the new DB consolidators, but it still seems unlikely that this will be ready for inclusion.

DB funding code on ice

TPR had been hoping to consult on its new DB funding code by the autumn of 2019, having already shared informally a lot of the thinking behind this. Brexit uncertainty meant TPR was forced to announce that there would be two consultations, with the code itself not being available until 2020. However, as a result of increasing political uncertainty in the second half of 2019, neither consultation has yet been released. We expect to see the first in March 2020.

Focus on DC governance

TPR reinforced its concerns about poor governance, particularly for DC schemes, by launching a consultation on the future of trusteeship and governance. It noted the clear disparity between the experience of savers in well-run and badly-run schemes and suggested that, if trustees cannot meet the required standards, they should wind up and consolidate savers into a better-run scheme.

Meanwhile, the new regulatory regime for DC master trusts went live in 2019. In November, TPR announced that only 37 of the original 90 master trusts had achieved authorisation. We expect further consolidation to take place in 2020.

Pensions dashboard needs fresh impetus

The problems with the development of the pensions dashboard are not going to be put right simply by the provisions contained in the Pension Schemes Bill. This is an area crying out for ownership and leadership from the new government.

Manifesto promises on tax

Based on its manifesto promises, we can expect reviews of two areas of pension taxation from the new Conservative government in 2020, namely:

  • net-pay schemes, where low earners do not receive the same level of tax relief on their pension contributions as savers in relief-at-source schemes
  • tapered annual allowance, although the review seems to be limited to NHS pensions and not concerned with wider problems associated with the tapered annual allowance.

De-risking at record level

2019 was a bumper year for bulk annuities. DB schemes insured a record £40 billion of their liabilities, including 5 deals in excess of £3 billion – Allied Domecq, Asda, BAT, GEC and Rolls Royce. 2020 is expected to be another strong year, as prices remain competitive despite the growing demand, although probably not quite at the same level as 2019. The market for longevity swaps was generally quiet in 2019, the notable exception being HSBC’s £7 billion transaction.

Many schemes recognise that they are just not ready to carry out a de-risking transaction in the current busy marketplace. There is no quick fix here, which is why many schemes have started taking concrete steps to get ready to transact in two to three years’ time.

The end of RPI?

We are now expecting the consultation on the future of the RPI to take place from 11 March to 22 April 2020. At present it seems unlikely that RPI will continue in its current form beyond 2030, when the UK Statistics Authority intends to redefine RPI as CPIH (it has the unilateral power to do so in 2030). The planned consultation will consider whether this redefinition should happen as early as 2025. The gilts market has begun to reflect the likelihood of a change that will have far reaching implications for the value of the liabilities and the assets of many DB schemes.

Conclusion

If Brexit developments allow, 2020 could prove to be a busy year for pensions. Only time will tell whether any of these small steps will lead to a giant leap forward….

For more details about how bac can help you navigate the challenges of 2020, please contact us at info@bathactuarial.com.

Dashboard

Investment returns by asset class

Investment yields

Annual rate of inflation (%)

31/12/2018 31/03/2019 30/06/2019 30/09/2019 31/12/2019
Expected RPI inflation over 20 years
3.58%
3.59%
3.55%
3.46%
3.36%
Index-linked gilts
-1.59%
-1.86%
-1.90%
-2.21%
-1.85%
Fixed interest gilts
1.81%
1.54%
1.44%
0.95%
1.30%
Corporate bonds
2.76%
2.36%
2.25%
1.81%
2.00%

Investment yields

31/12/2018 31/03/2019 30/06/2019 30/09/2019 31/12/2019
Expected RPI inflation over 20 years
3.58%
3.59%
3.55%
3.46%
3.36%
Index-linked gilts
-1.59%
-1.86%
-1.90%
-2.21%
-1.85%
Fixed interest gilts
1.81%
1.54%
1.44%
0.95%
1.30%
Corporate bonds
2.76%
2.36%
2.25%
1.81%
2.00%
  • 31/12/2018    ~    3.58%
  • 31/03/2019    ~    3.59%
  • 30/06/2019    ~    3.55%
  • 30/09/2019    ~    3.46%
  • 31/12/2019    ~    3.36%
  • 31/12/2018    ~    -1.59%
  • 31/03/2019    ~    -1.86%
  • 30/06/2019    ~    -1.90%
  • 30/09/2019    ~    -2.21%
  • 31/12/2019    ~    -1.85%
  • 31/12/2018    ~    1.81%
  • 31/03/2019    ~    1.54%
  • 30/06/2019    ~    1.44%
  • 30/09/2019    ~    0.95%
  • 31/12/2019    ~    1.30%
  • 31/12/2018    ~    2.76%
  • 31/03/2019    ~    2.36%
  • 30/06/2019    ~    2.25%
  • 30/09/2019    ~    1.81%
  • 31/12/2019    ~    2.00%

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 reviews funding valuations, it shows a keen interest in the scheme’s risk management framework and usually asks for copies of the risk register, business plan and IRM framework. You will need to be able to demonstrate that your framework is used by the trustee board to manage the scheme’s risks on an ongoing basis.
  • Trustee effectiveness is another key area of Regulator scrutiny. Are you able to demonstrate the effectiveness of trustee decision-making?
  • Consider running a series of “what if?” scenarios through your IRM framework. As well as providing helpful training, this kind of 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 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 realistic buyout basis.
  • When did you last audit the quality of your scheme’s membership data and benefit specification? Would these be adequate if the company wanted to pursue a bulk annuity in the short term?

Corporate actions

Funding

  • In 2020 there will be two consultations on the new DB funding code, but the Regulator has already told us much of the detail.
  • Companies are starting to consider what this will mean for their funding plans – will they go fast track route or bespoke? Whilst the new code is not expected to apply to 2020 valuations, it will have a significant indirect effect. The structure and design of a long-term funding target will be a key part of future valuation discussions.

Bulk annuity pricing

  • The series of £bn+ bulk annuity transactions in the last quarter of 2019, including some with significant deferred pensioner populations, has highlighted how close many schemes may now be to an insurance solution.
  • This has implications for how schemes approach investment opportunities, in particular illiquid assets, and preparatory work on data cleansing and benefit specifications.

Annual allowance

  • Now is a good time to review and revamp your communications to those who may be affected by the annual allowance.
  • Whilst the tapered annual allowance is currently under review (at least in the context of NHS pensions), it seems unlikely that the tax treatment of pensions is going to get simpler anytime soon!

Pension developments/news

Pension developments

October

GMP equalisation

  • the GMP Equalisation Working Group published guidance on the methods that could be used to equalise GMPs and how to deal with common issues.

Record-keeping crackdown

  • the Pensions Regulator contacted 400 schemes and asked them to review their data within six months. Schemes that fail to report back on their data could be subject to improvement notices and then fines.

General levy

  • the DWP published a consultation on increases to the rates of general levy paid by occupational and personal pension schemes. Large increases will be needed if the current and growing deficit is to be removed.

November

Tax guidance on GMP equalisation

  • in its Pension Schemes Newsletter, HMRC said that it is aiming to publish high level guidance on tax issues arising from GMP equalisation in December 2019. This will cover the annual allowance, lifetime allowance  and LTA protection regimes.

Simpler DC statements

  • the DWP published a consultation on simpler annual benefit statements for DC workplace pensions. It was seeking views on how to achieve simpler statements, how the statements would work with new communication tools and how to encourage members to actually open their statements!

DB transfers

  • the Regulator updated its guidance for DB to DC transfers. From 9 December 2019, the FCA replaced its Approved Persons Regime so that only senior managers and specific other roles need to be approved. Trustees need to contact the IFA firm to check that the adviser concerned has been certified by them.

Fiduciary management

  • the Regulator published new guidance for trustees on running a competitive tender for fiduciary management services, in line with the CMA’s requirements.

December

New chair of WPC

  • in the General Election, Frank Field lost his Birkenhead seat and so has stepped down as chair of the Work and Pensions Committee.

Pension Schemes Bill

  • following the Conservative party’s victory, the Queen’s Speech on 19 December signalled the impending return of the Pension Schemes Bill, which is expected to be in a very similar form to the Bill that was originally introduced in October 2019.

ECJ Bauer case

  • the Court of Justice for the European Union ruled that a reduction in the pension benefits of a member, in the event of their employer’s insolvency, is “manifestly disproportionate” if that results in the member being below the EU poverty threshold (£10,500 per annum). Depending on Brexit, it may be that the PPF will have to provide 100% of scheme benefits in these specific cases.

Increased IGC duties

  • the FCA published final rules to increase the remit of Independent Governance Committees. The new duties, which apply from 6 April 2020, include reviewing and reporting on the provider’s ESG policies, member concerns, stewardship and value for money of drawdown investment pathways.

Pension news

De-risking

  • Rothesay Life transacted a £3.8 billion buy-in with Asda to fully secure its defined benefit liabilities (which are predominately deferred pensions), thanks to a £0.8 billion special company contribution. Rothesay also announced a £3.8 billion bulk annuity with the Allied Domecq Pension Fund and a £2.8 billion buy-in with the National Grid UK Pension scheme, covering a group of pensioners aged 70 and above.
  • The National Grid UK Pension Scheme agreed a further £1.6 billion buy-in with Legal & General.
  • Aviva completed a £1.7 billion buy-in for its own staff pension scheme, covering some 4,300 deferred and 1,500 current pensioner members.
  • Pension Insurance Corporation converted an existing longevity swap into a £750 million buy-in for the Scottish Hydro-Electric Pension Scheme.
  • The Electricity North West Group of the Electricity Supply Pension Scheme transacted an £805 million pensioner buy-in with Scottish Widows, covering the liabilities of around 4,000 members.
  • Zurich insured £800 million of mortality risk, via a longevity swap, for the pensioners of an unnamed FTSE 100 DB scheme.

Funding

  • Mothercare’s two DB pension schemes are no longer the responsibility of Mothercare UK Ltd, which is in administration. Instead they have been assigned to a new legal entity, Mothercare Global Brand Ltd, which is focused on the global international franchise arrangements.

Plan design

  • Unilever proposed closing the DB section of its UK scheme to new entrants and reducing the level of future DB accrual. Employees will have a benefits envelope of 25% of their pensionable salary to allocate to a variety of benefits including pension, life assurance top-up and take-home pay.
  • A dispute about the proposed increase in member contribution rate from 8.8% to 9.6% of salary in the Universities Superannuation Scheme led to University College Union members taking strike action during November and December.
  • There were mass strikes in France prompted by President Macron’s proposed pension reforms, which are intended to replace the 42 different private and public pension schemes in France with a universal points system.