As the dust settles on the events of 2020, trustees and sponsors will want to take stock of how scheme funding and investments have been impacted. Sponsoring employers may be struggling to steady their ships amid the storms of the global pandemic. The Pensions Regulator (TPR) has issued guidance on this point. In ‘Protecting Schemes from Sponsoring Employer Distress’ it discusses the adoption of a fully documented Integrated Risk Management (IRM) approach, with workable contingency plans and suitable triggers, together with covenant monitoring and regular engagement with the scheme sponsor. We will once again see IRM at the top of trustees’ and sponsors’ agendas.
There also undoubtedly be an impact on the dayto- day operation of schemes. Trustees, pensions managers, scheme secretaries and administrators are going to have to deal with a myriad of issues, such as the impact of sharing data with companies based in the EU - as the UK has not yet been added to the EU’s list of ‘adequate’ countries for data transfers. Trustees will also need to review and update data sharing contracts with service providers and third parties to ensure compliance with GDPR and UK Data Protection laws. That’s a sizeable to-do list, yet there is no mention of the other elephants in the boardroom that will need to be managed in the ‘new normal’. Climate change is one, with big expectations for a global shift in the mindset of global leaders meaning the regulatory focus on this area will increase. The Department of Work and Pensions (DWP) has been consulting on new requirements for large schemes (over £5 billion) to assess, measure, manage and report on climate-related risks. Schemes will need to assess how they may be impacted and the actions they need to take, including whether to publish an annual statement. The collective invested assets of pension funds are big enough to drive fundamental changes to some of the biggest issues the planet faces, including climate change, through Environmental, Social and Governance (ESG) investing and better societies through responsibly-focused investments. The regulatory, fiduciary and moral pressure will push ESG further up the agenda for UK pension schemes in 2021 and beyond. We will see trustees trying to make sense of ESG and what really matters; the focus will be on how decisions taken will impact asset returns, employer covenant and scheme members.
The refocused approach that will be required in the new normal is not wasted on those who are tasked with looking after the nation’s pensions savings. It is at times like this that a winning combination of collaboration and dynamism will help chart a path to safe passage through turbulent seas.
Working together will help tackle many of the challenges of the ‘new normal’, for example a refocus on climate change and the creation of effective vaccines to manage global health risks. In the UK pensions landscape we have already seen both political parties working together collaboratively on the new Pension Schemes Bill, focusing on the outcome not the process. This is powerful stuff. Collaboration with scheme sponsors, working with the right advisers and using talent to tackle the strategic issues will ensure attention remains directed towards the bigger picture and end game planning. End game planning will be shaped by the revised funding Code of Practice for Defined Benefit (DB) schemes when it comes into effect. In the meantime, for the many schemes that have plans in place, they will need reviewing and stress-testing; for those without, this will be the right opportunity for all stakeholders to get around the table to discuss.
We also know that in the ‘new normal’ we will see more schemes consolidating into DC Master Trust-type arrangements or even taking the newly regulated superfund path to liability management. Schemes considering these options require collaboration to smooth their entry paths and ongoing collaboration between all parties to complete successful transactions whilst keeping member outcomes in the front of their minds.
During the global pandemic, we have seen flexible working practices being widely adopted and this ‘dynamic working’ brings advantages to employers through productivity improvements and to employees in the form of improved job satisfaction and better work/ life balance. In pensions, dynamism takes the form of a drive to ‘continuous governance’. The future desired state is an efficient one whereby decisions are made by the right people, with the right skills, at the right time, to save time, money and resources. A process of outsourcing risk management to Accredited Professional Trustees that have attained the appropriate standards and operate to an agreed code of practice for professional corporate sole trustees is likely to be a growing trend; people whose specific role is to manage and mitigate future uncertain risks.
Future challenges abound us all, but we face them with the knowledge that the pensions industry is at its best when it comes together to meet challenges collectively. When addressing the uncertain future world it is good to remember the mantra that ‘we are all in this together’ and through working together we will, in the future, be able to look back with confidence and say ‘that was then, but it is much better now’.
This article was featured in Pensions Aspects magazine January edition.
Last update: 27 January 2021