By Vishal Makkar, Principal and Senior Consulting Actuary, Head of Retirement Consulting at Buck
With little in the way of new legislation to review, our focus can shift to the activity of the regulators.
The first master trusts were authorised by the Pensions Regulator this year and we saw further measures to improve pension scheme record keeping. Moreover, following a number of high-profile scheme failures in 2019, the regulator issued materials for DB scheme trustees to ensure that all schemes are prepared in case of employer events causing concern to members.
The Financial Conduct Authority (FCA) has also continued to focus on DB transfer advice market– with the British Steel saga still fresh in its memory – and we can expect to see further DB changes, including the banning of contingency charging, next year.
Some changes begin to take hold
The main confirmed changes this year have come in the investment space – specifically a ramping up of governance. Following the review by the Competition & Markets Authority into the investment and fiduciary management markets, new changes were brought in on December 10th. These mean that Trustees must now set strategic objectives for their investment consultants and comply with a range of new requirements when tendering for fiduciary management services.
Less exciting than regulatory change, but of great importance to schemes, is the issue of GMP equalisation. How pension schemes equalise benefits for the effect of guaranteed minimum pensions is something that most affected pension schemes have only really started to consider in 2019.
GMP equalisation is complex and requires a good deal of preparation. Key to this is data, and many schemes will now be thankful they have undertaken a reconciliation of their GMPs following the cessation of contracting out in 2016.
A large proportion of schemes are progressing well with equalisation, despite the fact that the industry has spent most of the year waiting for new guidance from HMRC on the equalisation payments. Additionally, the third Lloyds judgment on past transfers is to be heard in May 2020.
2020 and beyond
There are some substantial changes looming in 2020 and beyond, including further developments for DB scheme management as well as potential difficulty for the Pension Protection Fund.
At least two DB superfunds have already been established, and it is understood that the DWP is keen to put in place an authorisation regime for these funds. An opportunity may have been missed by not including this in the Pension Schemes Bill, but it would be strange if action wasn’t taken on this next year.
We are also expecting the long-awaited revisions to the Regulator’s code of practice on funding defined benefits. Originally scheduled for consultation in 2019, this is now due sometime next year, and is likely to include more focus on integrated risk management and a requirement to set an appropriate long-term funding objective.
Finally, a possible doomsday scenario could await the Pension Protection Fund in terms of the level of compensation provided to members. The Advocate General to the European Court of Justice gave an opinion in a case earlier in 2019, that compensation should not be less than 100% of accrued benefits.
We wait to see how the ECJ rules in this latest case (verdict due December 19th), but the PPF may well face an eventful 2020 if the court rules in line with the Advocate General. With all these changes to come, a new government and potentially even a resolution to Brexit, 2020 looks set to be a bumpy year for the pensions industry.
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