Pensions Perspectives - February 2025

At our Pensions Perspectives event, our team of experts shared their insights and analysis to assist trustees, pension professionals and sponsors in navigating the current challenges and opportunities within the industry. Topics included:

1. 01

   Pensions Pulse

   Kirsty Cotton , Charles Smith

   
   
   

   Latest news from Charles Smith

   Kirsty and Charles provided a rapid round-up of the latest news and developments in pensions including:

   • Scheme funding and market conditions
   • The evolving landscape of pension scams
   • Ministerial changes
   • Retirement adequacy and future policy discussions
   • Potential changes to inheritance tax legislation
   • Plans to reduce the PPF levy
   • Government proposals for surplus extraction in DB schemes

   If you'd like to discuss any of these in more detail, please reach out.

   Further reading:

   • Reimagining pensions in the UK
   • PPF publishes rules for 2025-26 levies
   • Unlocking UK pension potential: Surplus sharing and investment

2. 02

   TPR's Covenant Guidance

   Adrian Bourne , Helena Mules

   
   
   

   Adrian Bourne and Helena Mules explored the new covenant guidance

   Adrian and Helena explored the new covenant guidance from The Pensions Regulator (TPR) and its implications for schemes including:

   • A shift away from covenant ratings, focusing on how the covenant underpins risk in journey planning to a low dependency funding and risks basis
   • The distinction between "reasonable affordability" (which includes liquid resources) and "maximum affordable contributions" (which excludes liquid resources and determines supportable risk)
   • The introduction of Covenant Reliability and Longevity, emphasising the need to manage scheme risk over timeframes that can support those risks
   • The importance of trustee knowledge and understanding, contingent assets, and a proportionate approach
   • Assigning a value to contingent assets and considering "look-through" guarantees
   • Different levels of reliance on covenant, and how these can inform proportionality from high reliance with regular monitoring and deep-dive reviews to low reliance with light touch monitoring

   Further reading:

   • The new Covenant Guidance: The building blocks when considering the adequacy of covenant

3. 03

   Outlook for Life Expectancy

   Cobus Daneel , Stephen Caine

   
   
   

   Cobus Daneel and Stephen Caine debated life expectancy trends

   Cobus and Stephen debated life expectancy trends – will we continue to experience longer life expectancies over time or will life expectancies stop lengthening (and possibly even shorten)?

   • Putting forward the case for longer life expectancies, it was noted that the impact of historical shocks (such as World Wars or the Spanish Flu) were negligible on overall trends and covid should be no different, mortality rates in 2024 were at their lowest ever so the bounce back had occurred, and that technological change will help drive the next wave of strong mortality improvements
   • On the other hand, it could be argued that easy mortality gains have been made and potentially can't be repeated, COVID-19 is now endemic and and cause a low level of ongoing mortality for the foreseeable future, and there are significant strains on the NHS and social care, all leading to stagnating or lower life expectancies

   So, what do you think? Which side wins?

   Further reading:

   • What's going on in the longevity swap market?

4. 04

   Buyout 2030

   Shelly Beard , Tom Ashworth

   
   
   

   Shelly Beard and Tom Ashworth explored buyouts

   Shelly and Tom discussed the steps schemes aiming to buy out within the next five years could take.

   • There is expected to be enough capacity (and at an attractive price) for all those wishing to transact buy-ins/buyouts in 2030
   • Longevity reinsurance capacity – the longevity reinsurance market is currently very competitive with enough capacity expected in 2030. For those concerned about capacity, transacting a longevity swap now can secure advance capacity
   • Investment opportunities – we expect there will be enough attractive investment opportunities for the insurers to offer good pricing – be that via credit (if spreads widen) or by continuing to invest in illiquids like infrastructure projects
   • Capital – there are lots of investors willing to put money into supporting UK insurers – as demonstrated by three new insurers in the market over a 12-month period

   Of course, lots could change over 5 years so we suggest monitoring the market.
   The audience were asked which topics they'd like to explore in the buy-out space from a list. A summary of each of the topics is noted below:

   Transaction-ready investments

   • It's not possible today to know the right 'insurer ready' portfolio – as it varies over time, by insurer, and by scheme size
   • However, over the next five years, lots of sensible steps can be taken, for example:
   • 5 years out:
   • Consider the projected liquidity of your assets and make a plan for illiquids, if required
   • Consider how the scheme's LDI hedging is set up
   • 3 years out:
   • Potentially de-risk into credit, depending on market conditions
   • Update risk metrics to be relative to buyout
   • 6-12 months out:
   • Form a backup plan for any remaining illiquids – e.g. a deferred premium from insurers
   • Make final tweaks to the strategy – e.g. further de-risking and increasing hedge ratios

   Benefit specification

   • Completing the benefit specification is potentially a five-stage process which can take considerable time:
   1. Consider benefit insurability
   2. Analyse the historical trust deed and rules
   3. Understand administration practice
   4. Consider treatment of discretions
   5. Agree what to insure and drafting this into an insurer friendly benefit specification
   • Focusing on benefit insurability, things that insurers find difficult to insure include complex pension increases and Defined Contribution benefits with Defined Benefit underpins. There is a well-trodden path for resolving the latter and we have several of these projects on the go at the moment
   • Codification of discretions can also be time consuming, particularly if there are lots of discretions. A typical example of such a discretion is qualification criteria for financial dependency

   Member options

   • For schemes that are a few years from proceeding with a buy-in, member option exercises can be a win-win - a win for members because they have flexibility and choice on how to shape their benefits, and a win for the trustees and sponsor because it may improve the funding level
   • One good example is a bridging pension option, which gives members the option to have slightly more scheme pension now, before they reach state pension age, and then the scheme pension steps down when their state pension kicks in
   • This helps members balance their income throughout retirement, and an added benefit is it gives members a higher tax-free lump sum at retirement
   • This can be helpful for the scheme as it may allow more members to retire early, and also bring forward the liabilities, both of which are good for insurer pricing

   Communications

   • From a legal perspective, the first-time members need to be informed about the buy-in is within the first month of the buy-in executing (for GDPR purposes)
   • But we are increasingly seeing trustees consider communications earlier than this – for example letting members know that a buy-in is being considered, and thinking about the overall communications strategy – e.g. method and frequency of communication
   • There is typically a minimum of four different communications between buy-in and buyout and it's important that these are thought about carefully – for example there may be other changes to members' benefits that need to be communicated at a similar time such as GMP equalisation or changes to AVC benefits
   • WTW has a suite of buyout communications that combine technical accuracy with accessibility for members

   Member experience and administration

   • We've recently seen cases where the winning insurer wasn't the cheapest but where it was felt they offered the strongest member experience
   • With this growing focus, insurer propositions keep evolving—what's unique today often becomes standard tomorrow
   • We suggest a 3-step process to understand member experience in a buy-in/buyout context:
   1. Compare insurer offerings to your members' current experience. This will provide comfort to trustees and ensure any scheme-specific requirements can be negotiated with the insurers
   2. Compare insurers with each other using WTW's annual insurer member experience report. This answers questions such as how do the insurers perform versus their long-term SLAs, and what systems and processes are in place to meet future demand and risks
   3. Consider the buy-in to buyout support provided by the insurer and how well they will engage with your administrator

   Data readiness

   • For any scheme considering buyout in 2030 we'd recommend undertaking a data audit, but ensuring it is focussed on what is actually important to insurers
   • Data doesn't have to be perfect for the buy-in phase, but undertaking this audit helps sequence the data journey plan and work in tandem with other data projects such as Pensions Dashboard
   • Data gaps can be categorised in four ways:
   • The "need to haves" – data items required before buy-in
   • The "nice to haves" – bigger ticket data items which ideally are completed before buy-in to maximise price certainty
   • Information that is needed, but not until buyout. It's good to have this in mind as you may be able to collect it alongside other projects
   • Items that aren't needed, so time / money should not be wasted filling in these gaps
   • The first three categories are, in almost all cases, no regrets required work

   Alternative risk transfer

   • By alternative risk transfer we mean non-traditional transfer of risk to a third party who provides a capital buffer to support the scheme targeting a pre-agreed destination – e.g. a superfund or a capital backed arrangement
   • We are still awaiting on legislation covering superfunds, expected in the coming months
   • Last year, the Pensions Regulator released further detailed guidance with some key developments on how it assesses superfunds, which also touched on expectations of capital backed arrangements
   • In terms of 'Buyout 2030', alternatives may be useful where buyout in 2030 is an aspiration rather than an expectation
   • For those schemes that are 80-90% on a buyout basis, a superfund transaction may be a credible route to bring buyout forward
   • For a scheme which is 70-80% funded on a buyout basis, a capital backed arrangement may be appropriate to allow more investment risk to be taken and to provide a sponsor of last resort

   Small schemes

   • Typically, we regard schemes that are sub c£150m as "small". In practice such deals make up the majority of the market
   • Insurers have taken several steps to cope with increased demand from small schemes, e.g.:
   1. Insurers have worked hard to streamline their processes – e.g. with bespoke data templates
   2. Increased capacity from newer entrants to the market, with Royal London quoting on deals down to £10m and Utmost focussing on deals below £100m
   • Over the next few years, the key test for this market will be ensuring post-buy-in processes keep pace with the number of deals completing buy-in
   • Smaller schemes can protect themselves from potential changing appetite over the period to 2030 by being well prepared – including having completed GMP equalisation and the lion's share of data cleansing

   Buy-in to buyout

   • While buy-in transfers most risk, it doesn't mean most of the work is done, far from it. Work from buy-in to buyout shouldn't be underestimated and all parties should be aware of how much caution or ambition is built into the plan (and attached budgets)
   • Two tips for success:
   • Work with advisers who have lived through the process many times before and have seen the pitfalls – e.g. when transitioning payroll or integrating GMP equalisation shortly before buyout
   • Consider what can be done in advance of buy-in so you are well prepared. There is lots of "no regrets" work that can be undertaken such as checking whether historical buy-ins exactly match scheme benefits and considering options for any scheme individual annuities

   Further reading:

   • De-risking report 2025

If you'd like to discuss any of the topics covered, please contact your WTW consultant or complete the form on the right, or below on a mobile device.