Defined Benefit
 Susan McIlvogue, Partner and Head of Trustee DB at Hymans Robertson comments on the increased pressure from the Regulator that is expected in 2019
“Trustees and sponsors will really start to feel the Regulator’s bite in 2019 as it implements its “clearer, quicker, tougher” approach to regulating pensions. The Regulator will continue to demand that schemes are treated fairly relative to shareholders, a point likely to be reinforced in its Annual Funding Statement which it will write with one eye on the new Code of Funding Practice. Trustees and sponsors should also get ready for more onerous reporting requirements, with an expanded set of notifiable events and new Declaration of Intent expected. Many schemes have already started to feel the impact of intervention but with this expected to continue trustees and sponsors should make sure they understand what might trigger Regulator intervention and be prepared if its jaws come down in their direction.”
“On top of all this, trustees will need to consider their strengthened duties in relation to responsible investment, the implications of the CMA review and, for the first time, trustees of defined benefit schemes will need to carry out a Value for Money Assessment - so a busy year ahead!”
Commenting on the take-off in the DB consolidation market and the need for ‘end-game’ planning Susan adds: “DB consolidation has been a hot topic this year and this looks set to continue with 2019 seeing the first schemes entering the newly emerging commercial consolidators. Trustees need to make sure they keep up with developments and fully understand the range of consolidation options available. Then they can decide which is right for their members rather than just assuming that the status quo represents best value. It will be vital for trustees to keep an open mind, consider the options available and objectively reach the best decision for their members. Commercial consolidation may be the right answer for some, but if it is not, more traditional forms of consolidation can create value, particularly for smaller schemes, through reduced running costs, good governance and more effective investment strategies.”
“End-game planning is a growing trend which is set to continue for 2019. Managing the last stage in a scheme’s journey is complex and trustees should have a very clear understanding of the end destination and establish a holistic plan at least 5 years before reaching the finish line. Our analysis indicates that this finish line could be closer than many realise so it is more of a priority than some may realise.”
Commenting on maximising value from lower risk investment strategies Susan continues “As schemes continue to reduce investment risk, 2019 will see them searching for assets which can create more value. Key to this value creation will be strategies that deliver predictable income and returns in excess of gilts with a high level of confidence. For over four years we’ve been talking to trustees and sponsors about the need for income to meet benefit cashflows and this will continue into 2019, with an increasing emphasis on capital efficiency. Following a 10 year bull run in equities, we predict that many trustees will consider reducing their equity allocation or protecting their downside exposure. Trustees will also need to consider their optimal levels of interest rate and inflation hedging and as hedging levels increase, liability benchmarks will need closer and more regular scrutiny.”
“Buy-ins will continue to be an important risk management tool for more and more schemes and can be a great opportunity to create value. Competitive pricing in 2018 fuelled demand and for the first year ever, demand from pension schemes to complete bulk annuities outstripped supply. This shift in supply and demand means that trustees will need to be more prepared than ever in 2019 in order to maximise value for their members, with a clear understanding of insurance companies and how they prioritise their efforts.”
Workplace Savings
 Paul Waters, partner and Head of Guided Outcomes discusses what needs to be done to encourage greater saving in 2019
“Although 2018 has seen auto enrolment continuing to be a success in encouraging employees’ pension savings, there is still a lot more to be done to ensure that they save enough. So, we’d like to see the Government endorse the PLSA’s suggested targets when they are announced as part of its ‘Hitting the Target’ campaign, and for the industry to fully support them. Helping individuals to understand how much they need to save by providing clear, meaningful and simple targets with a saving aim of 12% as the next target is vital, if people are to have a solid base to build from in retirement saving. We know from using a simple target in Guided Outcomes® the difference it makes, by providing people with the context they need to understand how much to save. 2019 should be the year that the British workers begin to understand that it is not enough to just save into their pension, but that they have to save enough to provide the income they’ll need.”
“We hope that there will be a simple dashboard in operation by the end of the year now that the government has now shown support for its development. For progress to happen, however, there must be pro-active guidance from the SFGB, and we’d also like to see full commitment from the dozen or so largest DC providers in the UK. The success of the dashboard will also need a program of enhancements to be developed alongside to deliver a complete experience for consumers. These will be across all elements including state pension, DB, public sector schemes. The result should be the simple window into people’s retirement saving, that the UK has been lacking for so long. ”
Rona Train, Partner and senior investment consultant looks to the year ahead for scheme governance in workplace savings: “I expect 2019 to see pension scheme governance become an increasing priority for single trust DC schemes and master trusts as ramped up requirements for the Chair’s Statement come into force. Some schemes have already produced Chair’s Statements under the new requirements and all other schemes should now be making plans as to how they will deal with the additional costs and charges disclosure requirements. Trustees should be warned that the Statement will need a lot more time to complete and will require significantly more information to be compiled and collated than in previous years. For many smaller schemes, rather than taking on the required additional layers of compliance and cost, we expect to see many throw in the towel and move into Master Trust arrangements where they can simply hand over the day-to-day governance responsibilities. The regulator has warned that any schemes that do not comply with the new regulations, or don’t include sufficient information on areas such as the processing of financial transactions and trustee knowledge and understanding in their Chair’s Statement will face a mandatory fine. So, it is clearly in Trustees’ best interests to be prepared for the extra work needed. In reality, these lengthy and detailed Chair’s Statements won’t serve their original intended purpose of updating members on the value their scheme is delivering. They will simply become compliance documents.”
Discussing the key themes for investment in 2019, Rona Train comments: “2019 will bring a much greater focus for Trustees on environmental, social and governance issues, or “responsible investment” as we prefer to call it. They will need to reflect their views in their Statement of Investment Principles and it will no longer be good enough simply to include a line about how they have delegated decisions to managers.
“Historically, responsible investment has often been seen to be about ethical investment - or so called “values” investing- whereas now this has widened out to be a focus on “value” and risk management. Setting a clear set of investment beliefs in this area will be vital. There is still a lot of misunderstanding of what responsible investment actually means and significant education will be required to help Trustees get up to speed with the new regulations and the topic more generally. Trustees will also need to have a greater focus on what their managers are doing in this space and be able to tell members about the approach they are taking.
“And we’re starting to see a change in members’ attitudes to responsible investment. Several recent studies have shown that DC members already think their pension is being invested in a responsible way. In spite of this, we know that members seldom make active choices within their pension scheme so making sure the default strategy reflects the Trustees investment beliefs will be crucial. Also, if we can use this topic to engage more people in their pension savings, that can only be a good thing.”
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