Pension Scheme Management

Key Developments During 2018

DWP Consultations

  • In March 2018, the government published its white paper “Protecting defined benefit pension schemes” to explain how it intends to increase the protections for defined benefit scheme members and make improvements to the system. The paper sets out government plans to protect private pensions through a stronger Pensions Regulator, clarify scheme funding principles and create the right conditions for, and promote the benefits of, consolidation. This paper follows on from the consultation “Defined benefit pension schemes: security and sustainability”.
  • In September 2018, the government stated its intention to improve the provision of information to, and financial capability of, individuals, so they can make informed and more confident financial decisions. It brought together the Money Advice Service, the Pensions Advisory Service and Pension Wise into the Single Financial Guidance Body (SFGB) to improve provision of free and impartial government sponsored money and pensions guidance and debt advice. It committed to facilitating industry to lead the creation of pensions dashboards to offer people access to their pensions information in a clear and simple form – bringing together an individual’s savings in a single place online. In the December 2018 “Pensions Dashboards” consultation the government indicated that it will legislate to compel pension schemes to provide their data for a dashboard provided initially by the SFGB and will also take steps to provide State Pension data for inclusion. There remains uncertainty as to what information will be in the dashboard and therefore for the data, assumptions and models that actuaries will be required to provide.
  • In November 2018, the consultation “Delivering collective defined contribution pension schemes” set out the government’s proposals for collective defined contribution (CDC) pension schemes which allow contributions to be pooled and invested to give members a target benefit level. These schemes will give rise to new actuarial work including the proposed scheme actuary role. These schemes will require actuaries to take into consideration the treatment of different policyholder groupings where intergenerational fairness will be a key consideration.
  • Consolidation of DB schemes is a hot topic with a range of proposals including ‘superfunds’ where a third-party capital provider would replace the employer covenant of the sponsor. The DWP consultation “Defined benefit pension scheme consolidation” covers issues including the governance of such entities, controls over the supply of capital and withdrawal of profits and the method and frequency of valuations. Although there are benefits from economies of scale, there may be increased risk from insufficient control over commercially invested capital and over the terms on which DB schemes are allowed to enter a superfund. Actuaries will play an important role in these schemes and will need to balance the needs of the various stakeholders and be aware of the danger of commercial pressures eroding the security of members rights.

DB to DC Transfers

  • DB to DC transfers continue at a high rate and recent FCA research showed that a significant number of DB members are not receiving suitable advice when transferring out of occupational pension schemes. In “FCA PS18/6: Advising on Pension Transfers” the FCA stated that the starting position should remain that a transfer is not in the individual’s best interest. The FCA continues to consult on the details of their proposals on roles and processes in respect of pension transfer advice.

Mature DB Schemes

  • Mature DB schemes present different challenges to those facing open schemes across various areas such as funding, investment and risk management, operations and governance. In May 2018, the IFoA working party “Running Off Mature Schemes” published a paper covering the many issues faced by such schemes and how they might tackle them. It also set out a framework for managing their run-off as they move through the various stages of maturity. Cashflow Driven Investment strategies which are mentioned in the report have grown in prominence as a greater number of schemes reach levels of maturity where benefit outflows begin to matter more.

Pension schemes investment strategies

  • Pension schemes investment strategies are evolving as they adapt to the low interest rate environment and requirements to consider ESG in their investment strategy. Schemes may also need to consider the impact of Brexit and climate-related risk on the strength of employer covenant (see Political and Legislative, Market Uncertainty and Climate-related Risk).

Actuarial Considerations

  • These developments are likely to change the behaviour of pension providers and members and hence may increase the uncertainty around actuarial work. Actuaries should keep up to date with changes and consider impacts on data, models and assumptions as well as the potential for commercial pressures, conflicts of interest or group think.
  • The JFAR has set up a Pension Working Group with three workstreams – DB Scheme Consolidation, DB to DC Transfers and Pensions Dashboard. These workstreams will be reporting to the JFAR during 2019.
  • There are several IFoA working parties active in research into pensions issues including transfer value activity, the pensions dashboard, use of technology, running mature schemes and member/pensioner behaviour/choices.

Summary of 2017 Discussion and Actuarial Implications

  • The financial position of defined benefit pension schemes in the current environment is challenging. The uncertain economic conditions including Brexit may also make it more difficult to assess employer covenant and the assumptions used in the valuation to allow for it. Actuaries may face commercial challenges to their work from scheme sponsors to adjust assumptions used for funding to reduce contribution requirements, or to recommend investment strategies which rely on more complex or innovative products in the search for higher returns.
  • Since the introduction of Pension Freedoms in April 2015, consumers have more options available to access their pension savings. This, along with the current low interest rate environment and the consequent impact on transfer values, has led to historically high levels of transfers. The actuary setting transfer values faces a challenge to balance practical requirements against the needs of fairness – for the ongoing scheme as well as the transferees. There are several reasons why this is a challenge including, allowing for selection risk, the funding level of the scheme, the liquidity of the assets supporting the scheme and the volatility of the investment markets. Actuaries could also face pressure to quote transfer values which encourage transfers reducing the long-term liabilities for the sponsor.
  • Actuaries are not often involved in the delivery of professional advice to individual members but may be involved in the design of systems developed to provide robo-advice. There is a risk that the data, systems and assumptions used for robo-advice to individuals do not adequately reflect the circumstances of the specific transferee (e.g. attitude to risk, dependents, other financial resources). There is also a risk that scheme sponsors using modelling systems to test alternative actions or to assess progress of scheme solvency may not fully understand the complexity and inter-relationships of the assumptions.
  • Actuaries are well placed to play a role in advising trustees, sponsors and other users on the complexities of DB pension scheme management. Actuaries may wish to consider the best ways to communicate the assumptions, judgements and uncertainties to their users to support them in making appropriate decisions.

Further Reading

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