LCP warn that the changes to DB funding rules that are being consulted on by the Pensions Regulator (TPR) combined with the emergence of DB consolidators and the growing range of innovative products to help schemes reach their goals, is creating a complex picture that corporate sponsors need to be on top of.
Just some of the key issues that they need to watch out for are:
• Company directors must protect themselves as individuals against new criminal and financial sanctions. When the Pension Schemes Bill comes into force in 2021, prison sentences of up to 7 years and fines of up to £1million may apply to individual company directors who take their eye off their scheme.
• Traditionally, insurers and banks have been sources of third-party capital for DB schemes, but new players are now emerging. For example, private equity firms are investing in DB schemes in a number of ways such as M&A and providing capital support for DB consolidators and similar solutions.
• Sponsors need a clear plan on how their DB pension fits into their wider short-term commercial strategy. This depends on company specifics and Brexit, but will often involve the use of contingent funding. Many companies have taken up the options for breathing space that the regulator has given in the shape of deferring contributions.
• The ban on contingent charging which came into effect in October makes it even more important for sponsors and trustees to consider offering IFA support to their members.
• Following changes to the corporate governance code and Investment Association guidelines, sponsors should consider their options to act where executives have a contribution tier with a pension/cash rate of 25% or higher. This will keep them in line with increasing pressure to curb high executive remuneration.
• The imminent Treasury response to the consultation around whether to bring forward the planned 2030 change from RPI to CPIH will have a big impact on valuations, company accounts and funding targets. This will create winners and losers.
• Pensions accounting has never been easy, but 2020 year-end accounting will prove more challenging than most. In September the aggregate position of the FTSE100 pension schemes was the worst position for three years.
Phil Cuddeford, Partner and lead author of the report, commented: “Understandably, pensions have been low on the corporate agenda as businesses have grappled with the immediate fallout and market volatility from Covid-19. The tsunami of change including greater personal responsibility for company directors, innovation in funding and end-game options, big shifts in the funding regime, and RPI coming down the track, means that pensions need to quickly zoom up the agenda.
“Reviewing the long-term pension strategy, prioritising projects, and proactive involvement on the scheme investment strategy are three key steps that every company should take to be on top of these changes.”
LCP Autumn Corporate 2020 Full Report
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