 By Laura Andrikopoulos, Head of Governance Consulting, Ross Fleming, Co-Head of Trustee DB Investment, Laura McLaren, Partner, Elaine Torry, Co-Head of Trustee DB Investment, Amy Walker, Associate Actuarial Consultant from Hymans Robertson
It’s from this place that we bring you our DB 2022 Outlook – our overview of the things that trustees and employers should be looking out for and planning for over the course of 2022.
Climate change
The potential impacts of climate change within pension schemes are large and wide-ranging, stretching from areas of funding and investment to covenant and governance - it’s no wonder that climate change is one of the most significant risks facing DB pension schemes. It’s clear that trustees and sponsors must address this sooner rather than later. However, the Pensions Regulator isn’t convinced that they are doing enough. In their Climate Adaption Report, it stated that too few schemes are giving enough consideration to climate-related risks and opportunities.
 ACTION: Although the global scale of the challenges ahead can feel overwhelming, trustees should get educated on climate-related risks and opportunities. It’s from there that trustees can begin to assess the potential impact of climate change on their scheme in particular, to gain an understanding of their starting point. This will help to inform objective setting and subsequently will allow them to develop and implement a strategy to tackle specific climate-related risks and opportunities facing the scheme. Considering all of this within the integrated approach to risk management is crucial. On top of this, trustees of larger schemes must ensure they comply with the Taskforce on Climate-related Financial Disclosures (TCFD) reporting requirements. Those schemes with assets within the £1bn to £5bn range are already shaping their plans for 2022 to ensure they hit the ‘ground running’ in the new year, whilst the £5bn+ schemes will have their first reporting year.
The new DB Funding Code
The Pensions Regulator held its first consultation on principles for the revised Code in 2020 and published an interim response earlier this year. Trustees will be required to set down a long-term funding and investment strategy and produce a ‘statement of strategy’ describing their approach. It also proposes a move towards a twin track approach whereby an actuarial valuation will either need to demonstrate compliance with minimum standards (‘fast track’) or trustees will need to explain and justify why it’s reasonable that they take a different approach (‘bespoke’). The second consultation, which will include a draft Code, is expected in summer 2022 (delayed from late 2021).
 ACTION: Although the Code isn’t expected to come into force until 2023, trustees and sponsors will be keen to benchmark their current approach against the Regulator’s finalised expectations. We’d encourage trustees and sponsors to work collaboratively to review long term plans and identify a preference for fast track or bespoke compliance, and to consider how the changes will impact the next round of funding discussions and investment strategy discussions. If schemes have a valuation in 2022 the Code won’t yet be enforceable, but it’ll be difficult to ignore.
The new consolidated Code of Practice
The Pensions Regulator held a consultation on the draft content for a new Code of Practice earlier this year. It noted a move to replace ten of the fifteen existing Codes (those dealing mainly with governance and administration matters) with one single consolidated code. As well as combining the current Codes, the Regulator, in line with the underlying regulation around effective governance that came into force in January 2019, has also proposed a number of additions. One of the major new items is the Own Risk Assessment (ORA) whereby trustees will be required to evaluate the effectiveness of their system of governance and the efficacy of the risk controls in place.
 ACTION: Although the new consolidated Code is not expected to be effective before summer 2022, considerable work will be required ahead of this, even for the most well-governed schemes, to ensure the new requirements are satisfied. As a first step, trustees should put aside time in the near future for business planning, including time to review the draft Code against the policies, procedures and governance framework they currently have in place.
Pension Schemes Act 2021
The Pension Schemes Act 2021, which became law at the start of the year, established a lot of important primary legislation. However, further secondary legislation and guidance is required to bring most aspects into force. The most significant changes include new criminal sanctions, civil penalties and boosted information gathering powers for the Regulator, new grounds for contribution notices, an extended notifiable events regime and changes to transfer value rights.
ACTION: Trustees and sponsors will need to understand and navigate the new regulations, especially when it comes to any corporate activity. With confirmation on the final details still required in some areas, trustees should watch closely for this detail to emerge. Whilst the Regulator has confirmed the boosted powers and sanctions will be aimed at punishing the most serious intentional or reckless conduct, it will be interesting to see how this plays out in practice.
The changing financial climate
The pandemic led to an unprecedented impact on financial markets across the world. As a result, pension schemes were hit hard – many have faced significant funding and investment challenges. Now, nearly two years after the pandemic hit, financial markets try to grapple with the new post-COVID world. Whilst most schemes will be protected from short-term changes in interest rates and inflation through hedging programmes, the key focus is on rates in the longer term. Certainly, there’s a concern that interest rate and inflation expectations are rising, potentially leading to increased member benefits and liabilities.
ACTION: The impact on individual schemes will vary considerably depending on their funding and investment strategy, as well as specific benefit structure and hedging strategy. Good practice has seen the majority of clients review (or plan to review early in 2022) the impact of their interest rate and inflation exposure relative to their target levels.
Other items on the horizon
Although they didn’t make our top five, there are a number of other items that trustees and employers should keep in mind over 2022.
Whilst the COVID-19 pandemic saw death rates well in excess of those reasonably expected at the beginning of 2020, there is still uncertainty surrounding the long-term impacts. Disruption to non-COVID-19 medical care and the broader economic impact are key drivers that are likely to influence mortality rates in 2022 and beyond. Trustees might consider undertaking scenario analysis to understand the impacts further.
For most schemes, GMP equalisation has taken a back seat this year as other issues have taken priority. However, it will be difficult to put the issue off for much longer. If they haven’t already, trustees should start to assess the availability of their data and start looking at advice on designing the approach to GMP equalisation.
Publication of proposed regulations for the pensions dashboards, which will allow individuals to have access to their pension information online, securely and all in one place, is expected to begin soon. It’s anticipated that the dashboards will be available in 2023. Trustees should keep themselves informed of progress and consider any scope to review or audit scheme information currently held.
With all this change on the horizon, understanding the potential implications and building this into future work plans is a good first step.
|
