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The new normal for DB Pensions
6 January 2021

The new normal for DB Pensions

It has, of course, become the new normal to talk about the new normal! But there have been so many changes affecting Defined Benefit (DB) pensions that grouping these by broad themes could be a worthwhile exercise.

Whenever I feel overwhelmed, I find that writing down a list of what I need to tackle helps to clear my mind. I thought I would do the same for the many challenges that DB pension schemes are currently facing, which fall under three broad themes:

1) The world has changed

Remember May 2016, when Leicester City won the Premier League at the actuary-baiting odds of 5,000- to-1? That seemed to mark the time when the world stopped being nicely predictable. Shortly afterwards, the British people voted to leave the EU, and the American people voted for Donald Trump to be their president. From the perspective of pension schemes, Brexit was, and continues to be, a source of volatility for interest and exchange rates, whilst the prospect of a US-China trade war had a similar effect on global equity markets.

Four years on, a once-a-century pandemic has spread chaos across the world, leaving virtually no-one unaffected. COVID-19, having brought about the fastest fall and recovery in stock market history, has the potential for plunging schemes deep into the red again. And, looking further ahead, how should investment portfolios adapt to the prospect of climate change and the rise of China as a super power?

2) The pensions environment has changed

We counted over 20 existing and imminent regulatory actions falling upon DB schemes in relation to investment alone, before even mentioning the Regulator’s fast track / bespoke funding regime and and Guaranteed Minimum Pension (GMP) equalisation. Besides these, we are witnessing the evolution of three ‘end game’ choices for maturing schemes:

  • Run-off: many schemes have shifted to a Cashflow Driven Investment (CDI) approach to run off their liabilities. The COVID crisis has also highlighted the concentration risk inherent in some versions of this strategy.
  • Consolidation: this new option, offering better affordability than buy-out at the expense of reduced security, may be a niche solution where the trade-off between sponsor covenant and additional capital backing is clear cut.
  • Insurance: this remains the gold standard target for most schemes, with each year heralding new volume records and continued innovation.

Faced with the abundance of choices, the challenge for many will be to achieve clarity on what to aim for and how to get there.

3) The way we deal with changes has changed

At the risk of sounding a bit ‘meta’, one of the biggest changes is how we now have to work to deal with these changes. The consensus seems to be that working from home comes with advantages and disadvantages that mean we are about as effective as before.

But there is also a wider recognition that many trustee boards lack the bandwidth for an increasingly daunting to-do list. This has driven the continuing trend for greater delegation to professional specialists, whether by appointing independent trustees (including sole trustees) or fiduciary managers, in order to make use of their resources, scale and expertise to meet the challenges that lie ahead.

And what’s my take on where to start? For me, high on the list of priorities would be to improve the level of governance, and get in good shape for tackling the other challenges.


This article was featured in Pensions Aspects magazine January edition.


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Last update: 27 January 2021

Lok Ma
Lok Ma
Willis Towers Watson
Solutions Specialist

Assistant Pensions Investment Consultant - Berkshire

Salary: £31500 - £37000 pa

Location: Berkshire

Senior Pensions Governance and Secretariat Consultant

Salary: £70000 - £90000 pa

Location: Hampshire

Senior Pensions Analyst

Salary: £55000 - £75000 pa

Location: London

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