Looking ahead | What does 2023 have in store for pensions?
2022 was certainly eventful – multiple Prime Ministers, a new Monarch and a Market crisis that surprised everyone.
So, what do we think will happen in 2023? How will the events of 2022 continue to impact us in the new year and what should we as an industry be looking out for?
We asked a number of Isio’s experts for their predictions...
Iain McLellan, Head of Research & Development
2023 looks like it will be another busy year for the pensions industry. Here are a few events and milestones we should be looking out for:
- New Pensions minister Laura Trott sharing her priorities and hopefully committing to a timeframe for implementing the 2017 Auto Enrolment recommendations and publishing Baroness Neville-Rolfe’s review of the State Pension Age
- Continued fallout from 2022’s market volatility with trustees implementing revised investment strategies and responding to the regulatory response – reduced levels of leverage and greater liquidity to support LDI strategies
- Trustees battling to respond to increasing governance demands – the Single Code of practice coming into force, trustee board diversity, pension dashboards (including £50k fines for not complying), continued short-term inflation challenges…. the list goes on!
- A ramping up on ESG focus – TCFD reporting extended to smaller schemes, plus introduction of TNFD requirements not to mention the possible regulation of ESG ratings
- Solvency II changes feeding into market, with the likelihood of improved pricing
- More McCloud issues (or possibly even solutions!) for public sector schemes
- Mortality assumption setting will come under the microscope with the CMI publishing both its latest pensioner mortality base tables and the 2022 projection model
- Against the backdrop of a record year of pension insurance deals, will consolidators finally get any deals over the line and move from theory into practice
- Multi-employer CDC regulations, which could provide a default income for life for those building up DC pots.
And maybe, just maybe, we will see the long-awaited revised Notifiable Events regime coming into force…!
Samantha Coombes, Director of Pensions Administration
Achieving clean scheme data that is fit for purpose is going to be high on Trustee agendas in 2023. This isn’t a “nice to have” anymore – exercises such as GMPE, dashboard readiness, digital member admin and strategic activity make it an absolute must. Trustees will be looking at how they can achieve this aim in a cost-effective and proportionate manner.
The Pensions Dashboard is for life, not just for Christmas.
Girish Menezes, Head of Pensions Administration
Innovative Funding Solutions
Ian Cochrane, Director
After the turbulence of the last few months, we are seeing many pension schemes ending up much closer to being able to fully insure their liabilities – a target that before may have been considered unachievable in the short term.
For sponsors, this can present a dilemma – they would like to take the opportunity to get rid of the pension scheme for good, but do not want to risk overfunding the scheme by closing the gap too quickly and find insurer pricing has moved favourably.
In many cases a surplus in a scheme cannot be returned to the sponsor and even if it can be it comes with a 35% tax charge.
Therefore, we are seeing a renewed interest in escrow arrangements, where the sponsor puts cash aside for the scheme, but so that amounts not needed for buy-out can easily be returned. We expect this to further accelerate in 2023 as sponsors and trustees prepare for the path to buy-out.
While the concept is straightforward, the implementation can be complicated by differing views of how the escrow should or could be structured. Early engagement with the escrow bank or escrow agent is critical and we hope to see more consistency in the advice around the appropriate structure.
You can see Ian’s comments in the press here.
You can read more about escrow here.
Defined Contribution schemes
Mark Powley, Investment Director
Whilst I am not sure even with a crystal ball, that this time last year in 2021 I would have predicted what happened in markets and impact on DC schemes in 2022, in DC we take a long-term perspective, so don’t tend to see things change that much year on year.
However, the predictions below would illustrate progression in a number of areas which would help the industry innovate and plan for the future:
- Illiquid assets (e.g. the Long-Term Asset Fund “LTAF” highlighted in the Edinburgh Reforms) being integrated into default strategy design
- Less focus on price and more on quality that can add value and improve member outcomes at retirement
- Better engagement tools with members
- Increased focus on default pathways and de-risking phases of default strategies where the previous longstanding assumption that a switch from risky equities to lower risk bonds/gilts is the best way to protect member pots
- Further consolidation of master trust providers, as not all can possibly survive and be competitive plus the continued move from own trust DC to master trust as the legislation and governance burden for own trust DC gets worse
- If cost of living crisis continues and puts pressure on DC members being able to afford pension contributions, then the option of just having employer contribution levels paid into their DC scheme for a period of time
- Pressure on the Government to remove the continued freeze on the lifetime allowance as the income it can provide is further eroded