“Despite the events of 2020, there is growing demand to transfer risk to insurers through buy-ins and buy-outs, and we wouldn’t be surprised to see values exceed £30bn during 2021. Trustees contemplating a risk transfer transaction will need to be better prepared than ever, to demonstrate why they should be a high priority case in a busy market.
“The Pensions Scheme Bill, expected to receive Royal Ascent in the coming weeks, promises to make schemes safer, better and greener. The Bill has sparked much debate over the last year and this debate will no doubt continue throughout 2021 as supporting regulations emerge to clarify how some of the new provisions will work in practice.
“2021 will bring the new and long-awaited Funding Code from TPR, the biggest shake up in DB funding for over a decade. With the second consultation expected next Spring at the earliest, trustees and sponsors will be watching for where TPR sets the new Fast Track parameters. The events of 2020 are likely to influence where TPR sets these parameters and increase the need for sufficient flexibilities in the new Code.
“With the economic outlook remaining uncertain and combined with the challenges approaching from RPI reform and Brexit, not to mention GMP equalisation, it will certainly give us lots to navigate in the year ahead, with a foreboding sense that things could get worse before they get better.”
Commenting on three main investment issues facing DB scheme trustees in 2021 Ross Fleming, Co-Head of DB Investment, Hymans Robertson says: “2020 has provided us with a lot of market twists and turns and there have no doubt been winners and losers in the wake of the pandemic. Climate change will be a key consideration for 2021 following this year’s consultation requiring schemes over £5bn to address climate risk and provide public reporting in line with the TCFD framework.
There is likely to be an increased focus on managing climate risk effectively and ensuring it is on Schemes regular agendas for 2021 Whilst schemes between £1bn and £5bn will have a longer timeframe to prepare for these requirements, we would view 2021 as the year to start getting prepared and ensuring a plan is in place.
“The end of 2021 will see the long-awaited cessation of LIBOR as an interest rate benchmark. The transition to SONIA will have several impacts on the way Trustees manage their investment strategies and 2021 will be a year of ensuring suitable preparation plans are in place, and amendments are updated in documentation.
“Finally, the market volatility experienced during 2020 will be further impacted by the outcome of the RPI consultation reform and the challenges of Brexit. Schemes will undoubtedly look to 2021 to take stock and re-test their long-term objectives to review progress against plan. The impact on Scheme’s equity portfolios is perhaps where we’ll have seen most deviation in returns relative to the sharp fall and recovery in markets during the year. 2021 will therefore be key in Trustees reviewing their equity exposure by various factors to understand where they have specific concentrations relative to views of the market.”
Commenting on his hopes for the coming year the world of DC pensions, Michael Ambery, Head of DC Proposition and Strategic provider relations says: “My over-riding wish for 2021 is for the government to avoid using, or considering, taxation of pensions contributions or benefits as the funding method for the financial cost of Covid19. We remain concerned that pensions, and specifically pensioner poverty, will slip down the government priority order to manage the pandemic financial cost but would urge the government to consider the longer-term implications of this stance.
“We’d also like to see the government take action in 2021 to completely demystify the complexity surrounding tax relief. It would be great to see a full commitment to simplifying the issue of annual allowance that is leading late savers to breach their Annual Allowance. It would also be great to see the government take action to reset the levels of auto enrolment to 12% to diffuse the ticking time-bomb of retirement poverty.
“Finally, we look forward to the consolidated Governance Code which will change the requirements for governance and ensure government review is higher up the agenda for schemes.”
Mark Jaffray, Head of DC Consulting at Hymans Robertson comments on the themes that he believes will dominate DC in 2021: “2021 will be a jam-packed year as we all try to find some stability in our lives. In DC we will see continued development within responsible investment as the pace for change will certainly accelerate. If Trustees and Governance Committees have built a strong foundation this year with regulatory changes, developing their own knowledge in this area and developing their beliefs, then they will be really well equipped to challenge managers and providers going forward and to keep up with the pace of change as RI solutions continue to evolve.
“We will also see employers take the lead with designing their responsible investment beliefs and engaging staff on how to invest. This will also spread from pensions to wider savings. There will be greater focus on communication and engagement to members on responsible investment and adequate funding for retirement and generating income in retirement. This will dovetail renewed attention by providers on performance of their default funds and how they can further improve outcomes for members.”
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