While there are a number of differences in the operation of DB pension schemes in the UK and Ireland markets (mercifully, this will be the only reference to GMP equalisation in this article!), there are many fundamental similarities - both in terms of the direction of travel of regulation, and the key issues and trends affecting stakeholders. With this in mind, I thought I’d take a short walk through the survey findings and flag those that might resonate most with DB clients in the Irish market.
01
1 in 3 say the sponsor’s ability to support the scheme has weakened in the short term; 1 in 6 say it has in the long term.
Pensions practitioners in Ireland will be very aware that the Pensions Authority is putting increasing focus on schemes’ perceived ability to meet the promised benefits in the long term. The most important input to this, in my view, is the sponsor covenant – and many UK stakeholders believe this has materially weakened through the COVID-19 crisis.
I expect a challenging time for Irish trustees in the coming months as they come to grips with gaining a better understanding of the short- and long-term affordability of their schemes.
02
Nearly half of UK sponsors with ongoing DB accrual expect either to close the scheme or reduce its generosity within the next 3 years.
Inevitably, the economic turbulence is leading UK employers to take another look at this area. There are proportionately more open schemes in Ireland than the UK, so it is sensible to expect this trend to be mirrored here. It may be that employee representative groups which have to date fought pension change very hard will need to take a softer view in the context of the damage COVID-19 has wrought upon the economy, with sponsors less well positioned than ever to sustain the escalating cost of DB provision.
03
There is a trade-off between scheme security and business recovery: Trustees aim to shorten the time to meet schemes’ long term targets, while corporates expect to extend it. 64% of trustee respondents expect to achieve their scheme’s long-term objectives in no more than nine years. By contrast only 28% of corporate participants report this expectation.
Typical Irish time horizons may be longer, but schemes here also face conflicting pressures on their long-term goals and the strategies for delivering these. On the one hand, the Pensions Authority is focussed on making benefits more secure. On the other hand, economic circumstances are placing sponsoring employers under considerable strain and schemes will need to be very conscious about balancing member security with employer costs.
04
In the next three years, 4 in 10 UK schemes are looking to complete some form of annuity transaction.
With many UK pension schemes now moving closer to their long-term objectives there is heightened interest amongst trustees and sponsors in reducing DB pension risks, with a continuation of record-breaking activity. While the market here is overall considerably less mature, we are starting to see increased focus on this area from Irish schemes - particularly in the context of the more attractive insurer pricing available in recent months, which also has an important bearing on schemes’ long term Funding Standard liabilities. Member option exercises such as Enhanced Transfer Values and Pension Increase Exchanges are likely to continue to grow in popularity as risk reduction tools which can also help bring the endgame closer.
05
More professional trustees and schemes outsourcing more of their functions are expected to be the key trends in the governance of UK DB schemes.
Neither of the above findings should come as a surprise, and they are also very much in line with the direction of travel the Pensions Authority is pursuing as it looks to improve DB scheme governance in the context of the IORP II directive.
Trustees were also asked their view on how the move to virtual meetings during the COVID-19 pandemic has affected the governance of their scheme, with some interesting results. Shorter, more frequent meetings seems to be the new trend, but potentially at the expense of effectiveness. I would expect this experience to have been broadly mirrored among Irish pension scheme stakeholders.
06
Three quarters of respondents believe that Independent Trustees add value to the governance of their scheme.
The chief advantages identified by respondents were their knowledge of market practice (89%) and specialist expertise (87%). 7 in 10 feel that professional trustees have contributed to more effective decision making, and more than half think they have provided greater independence from the sponsor. These may be encouraging statistics for the increasing number of Irish trustee boards and sponsors who are contemplating involving an independent trustee.
We look forward to working with our clients over the coming year to consider how they might best respond to the trends identified in this article. If you’d like to understand more about the survey results and what they might mean for your pension scheme, or to speak to us about reducing risk or improving governance, please contact your Willis Towers Watson consultant.
*Almost 130 trustees, pension managers and other key stakeholders responded on the issues facing UK schemes in the summer of 2020.
