01
Defined benefit (DB) pension schemes’ fortunes have dramatically reversed. Now that many schemes are in surplus, following years of employer contributions, the government wants to make extraction of DB surpluses easier for employers.
“Earlier access to surpluses will be a significant change from the regime we are currently familiar with in the UK,” said Bina Mistry, head of GB corporate pensions consulting at WTW. “Whilst the owner of the surplus will depend on individual scheme rules, easier and earlier access to surpluses could create the necessary incentive needed for employers to run on DB schemes and invest more in growth assets – and helps address the asymmetry that exists when funding schemes.”
“It would be great to put surpluses towards improving DC outcomes,” added Rash Bhabra, head of retirement, GB, at WTW.
“Building in safeguards will be essential”, said Fiona Frobisher, deputy director of defined benefit policy at the Department for Work and Pensions (DWP). The government is consulting with the industry and will be developing policy in this area in 2024.
02
More broadly, the DWP is looking at DB and defined contribution (DC) across the board to support trustees and employers in making their investments work harder.
Fiona Frobisher said: “We are not trying to mandate anything here, but we are making sure that the options are available. Where there is an opportunity to make investments work harder, we want to support trustees and employers to help them to do that.”
Matt Howsham, head of growth, GB investments at WTW, observed: “The government is looking to encourage schemes to invest in assets that drive growth. But the pensions industry is going in the opposite direction right now.”
He explained: “We are seeing schemes divesting from assets the government is trying to drive them towards. We have a wall of capital that is moving towards lower-risk, fixed income securities to better place them to move into the insurance regime. Ironically, then the insurance regime increases the level of risk.”
The government is also encouraging DC schemes to look beyond public market investments. “Private market assets are severely underrepresented in the portfolios of UK DC pension investors. UK DC schemes invest 0.5%. In Australia it’s 20%, in the Netherlands it’s 7%, in Spain and Denmark it’s 5%,” observed Anne Swift, senior director, DC investment at WTW.
Swift continued: “The ability of UK DC schemes to invest into illiquid assets including productive finance ones is greater than any other investor type in this country. Average time horizons are at least 30 years in duration. And yet many end savers whose entire retirement relies upon their DC pension have little to no exposure.”
Ben Leach, WTW’s head of private market solutions, added: “At WTW, we don’t think productive finance assets should be exclusively UK based. Attractive assets are situated all around the globe. Our clients’ global private equity portfolios have generated five percent per year more than public ones over the last 30 years.”
A focus on growth should also translate into the early years of a DC saver’s journey, said Helen Gilchrist, head of DC consulting at WTW. “We believe DC schemes need to prioritise growth in the early years, as well as avoiding de-risking too early, to make sure savers don’t miss out on opportunities. Being too defensive is a risk in itself and could be hugely detrimental to outcomes.”
03
“The industry and regulator has had a long journey on the DB funding code and regulations”, said Fiona Frobisher. The changes in the regulations are partially prompted by industry asking the regulator deeper questions about what it means by ‘well-funded’ or ‘prudent’.
Frobisher explained: “Once we started talking to people and said, ‘We think DB schemes could take more risk’, the pushback we got was people saying: ‘Could you be clearer about what more risk means? What is the low dependency you get to?’ These are things we need to work out. Having funding regulations that make those aspects of the regime clearer is a useful enabler.”
04
Cyber risk is one of the most significant issues of 2024. “Kicking the cyber can down the road has been an option for a while – but the events of 2023 prove this is no longer viable,” said Dean Chapman, head of WTW’s cyber risk solutions for GB.
Chapman added: “There is no cloak of invisibility. Schemes, trustees and members have been significantly impacted through events of this year and most certainly will be going forward.”
Trustees and scheme sponsors need to do everything in their power to mitigate the risk of a cyber attack. They should also make extensive contingency plans. What if they were hit by one? What if they were unable to make payments to pensioners in the usual way? How would they respond to a data breach? In the event of a cybersecurity incident, would they be able to demonstrate to members, regulators and the press that they had taken every precaution possible?
05
Helen Gilchrist, head of DC consulting at WTW observed: “The government considers CDC a promising idea in decumulation. Our modelling shows that CDC has the potential to materially improve outcomes for members compared to annuities which also provides an income for life. It isn’t a silver bullet, but it could make a huge difference in the right circumstances.”
06
Dale Critchley, policy manager, Aviva Workplace Savings / Living Pension Steering Group welcomed the Financial Conduct Authority’s paper on the advice/guidance boundary and suggested trustees are in a good place to help facilitate support. “73% of people said they would like individual financial advice – but people don’t know how to find an adviser. They struggle to choose a builder, let alone a financial adviser.”
James Mouland, head of financial planning at WTW, further highlighted the challenges facing individual members when identifying appropriate and reliable sources of advice, with trustees better placed to navigate these challenges and conduct appropriate due diligence.
07
Whether it’s trustee boards or investment managers, diverse teams deliver better outcomes. They achieve 60% better results, making decisions in half the number of meetings, according to a Forbes study: Diversity + Inclusion = Better Decision Making At Work.
Diversity also results in better investment returns, says WTW’s global head of credit and manager research, Kate Hollis. “Our analysis of over 1,500 investment strategies found that the top quartile of gender diversity outperformed the bottom quartile by 45 basis points per annum in terms of net excess returns. It surprised us that it was so easy to identify.”
08
Will there be a capacity crunch as more DB schemes get ready to buyout? Gemma Millington, senior director, transactions at WTW said that irrespective of size, every scheme WTW has advised was able to find a place with an insurer in 2023. “There are a number of insurers in the market who have the appetite and capacity to write significant deal volumes.”
Looking forward – is this going to persist? “We do expect demand to increase over the coming years,” said Millington. “However, across WTW we are talking to around half a dozen potential new entrants to the bulk annuity market and are positive there will be some additional capacity provided by these parties. It just depends on how quickly they get there as to whether supply will keep up with demand in the meantime.”
For most schemes embarking on a buy-in, running a competitive process with insurers is likely to optimise the outcome. However, in some circumstances, partnering with a sole insurer might be preferable. For example, for schemes who have already undertaken a transaction, dealing with the same insurer – and insuring all members with the same provider – can outweigh price considerations.
Millington added: “An exclusive deal can deliver excellent outcomes. For example, we achieved one of the best prices we’ve seen in 2023 on such a transaction which completed in September, well over five percent below typical pricing for a scheme of its size and characteristics. That was because of new business aspirations the insurer had. We identified the insurer and matched them up with the scheme at the start of the process.”
09
The 2010s were a bad decade for longevity, with increasing obesity and healthcare pressures affecting life expectancy. This was all topped off by the global pandemic. However, the 2020s could herald positive improvements.
"I am very enthused by the prospect of positive news on the longevity side,” said Matthew Edwards, actuary and senior director at WTW. Obesity drugs are being developed which tackle this threat to people’s life expectancies.
Breakthroughs are happening in cancer, the largest cause of avoidable mortality in the UK, thanks to the invention of Galleri, a multi-cancer early detection test.
Edwards added: “At present, almost half of cancers are detected at stage three or four. When cancer is detected early on, survival prospects are much higher. If we have a test that can detect cancer at a very early stage then the outcome for longevity looks really promising.”
