Welcome to IQ
Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.
Change since 30 June 2024
Commentary
- It’s been a quiet quarter, and we don’t expect scheme’s funding positions to have changed materially either way in most cases.
- Gilt yields fell by c. 10-15 basis points over the quarter, with slightly lower falls of 5 – 10 basis points in long-term inflation expectations. As both these movements have been in the same direction they will largely offset each other for funding valuations.
- Equity markets were up slightly, with UK equity markets returning c1% over the risk-free rate.
- Credit spreads increased slightly (less than 5 basis points) over the quarter – and thus accounting positions may have improved slightly for most schemes.
New DB funding regime in force
Background
After many years of waiting, the new funding code has finally come into force and will apply to valuations with an effective date on or after 22 September 2024. The new code builds on the existing DB funding regime by requiring trustees and sponsors:
- to have a long-term plan to be at least fully funded on a basis that reflects a low-dependency investment strategy by the time their scheme is significantly mature; and
- to make sure their technical provisions reflect the journey plan to get there.
All of this will need to be documented in a new Statement of Strategy.
Isio’s view
With generally improved funding levels across UK DB schemes, the financial impact of the new funding regime may be less than first thought. The first valuations under the new funding code will however still require significant additional work in collaboration with the trustees. Those schemes with late 2024 and early 2025 valuation dates will end up acting as guinea pigs for the rest of the industry as it gets to grips with how the new requirements are applied in practice for the first time.
Why it matters
Sponsors should not rely solely on their trustees to understand and reflect the new funding regime at the next valuation. Sponsors should be:
- Thinking about what long-term objective to target, and the implications on the technical provisions.
- Confirming expected time to “significant maturity”, to understand how long you have before the long-term objective should be reached.
- Start thinking about employer covenant (now a legally defined term under the new regime) with future assessments to focus on company cashflows and “prospects”
- Consider whether to target the prescriptive “Fast Track” approach to minimise scrutiny from the Pensions Regulator, or the more flexible “Bespoke” approach.
Read more
Virgin Media case
Background
In June 2023 the High Court judged that historic amendments made to the Virgin Media scheme between 1997 and 2016 were invalid unless Section 37 actuarial certification was obtained (and could be evidenced) – a ruling which was upheld by the Court of Appeal in July 2024.
This case has wider applicability to DB pension schemes which were contracted out between 1997 to 2016 – who could also find that historic amendments are invalid if they don’t have the appropriate documentation.
Isio’s view
This potentially causes a huge headache for sponsors and trustees alike. The nightmare scenario would be having to unwind historic amendments simply due to gaps in records, rather than because these changes didn’t meet the requirements for certification at the time.
Given the potential impact based on a technicality, various industry bodies are actively lobbying DWP to intervene on this issue and retrospectively validate historic amendments which met all the right conditions for actuarial certification at the time, but where evidence of this cannot be found. However, it remains unclear whether DWP will step in.
Why it matters
For DB schemes going through an insurance or M&A process, there is a more pressing need to understand any potential risks to the underlying obligations.
More broadly, auditors are already expecting further investigation into this issue to have commenced, ahead of their next reporting periods – doing nothing is not an option.
Finally, sponsors should try to understand any potential changes in benefit obligations – particularly if significant – as these could have funding implications as well as influence strategic pensions decisions.
We will be running a webinar in the coming months, on the implications of the Virgin Media ruling. If you’d like to receive an invite, please join our mailing list.
Join our mailing list
Scheme run on survey of professional trustees
Background
With UK DB schemes better funded than they have been for decades, employers and trustees are considering whether to take the opportunity to move to insurance at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we surveyed 83 professional trustees responsible for over £350bn of DB assets to get their views on whether to run on and, for those schemes that do, how to implement this.
Isio’s view
Over two-thirds of professional trustees believe that the minimum member share of surplus to justify running on is 40% or less. This reflects the views expressed at our recent event for large sponsors that upside should be weighted towards employers who are responsible for funding 100% of any deficits that emerge.
Employers looking to run their schemes on can be encouraged that trustees are keen to work collaboratively with them. Their biggest concern is likely to be protection on insolvency which can be improved if necessary through contingent arrangements like escrows or parent guarantees.
Why it matters
Deciding whether to insure at the earliest opportunity, to run on over the longer term, or something in-between, will be the most financially important decision that most trustees and employers ever agree for their schemes.
The views of the sponsor are crucial – indeed the employers view scored as the most important factor for professional trustees in deciding whether to run on beyond full buy-out funding. However, trustees typically hold much of the power in agreeing the “endgame”, so sponsors need to understand trustee perspectives going into these discussions.
View the survey
Managing tail risks
Background
Many pension schemes are now well funded and running low risk strategies, and modelled risks metrics like ‘Value-at-Risk’ give the impression that not a lot can go wrong. However, we know from experience that “out of model” risks can and do happen. Over summer, for example, there was significant volatility in Japanese equities – an event which had only a 0.00000000000000000000003% probability of occurrence, and was in the top 5 market movements of all time. Whilst most schemes have limited exposure to this market, it does highlight the potential remaining risk.
Isio’s view
Sponsors and trustees should consider the exposure of their schemes to out of model risks. This review should identify the “pinch points” and understand their impact if the unexpected occurs. Examples of such pinch points include defaults, liquidity, deflation, longevity and IT outages. Where pinch points are identified a plan can be formulated – either to remove the exposure or to improve governance in case the event happens.
Why it matters
If a scheme with 1% asset outperformance over its liabilities has a 10% hit to funding, it would take over 10 years to recover without re-risking or additional cash contributions. Understanding these types of risks means that sponsors and trustees can be proactive if they occur, giving them the greatest chance of mitigating the impact. The LDI crisis in 2022 was a great example of this, where those with clear pre-agreed frameworks generally fared better.
Please get in touch with Barry.Jones@isio.com to discuss how we could help you to identify and manage remaining risks in your pension scheme
Get in touchIrish Auto-Enrolment launch delayed again!
Background
Ireland is the only OECD country without an Auto-Enrolment (or similar) solution in place. The Government has been considering a solution for decades, and a 1 January 2025 introduction had been quoted. However, much remains to be done including a search for asset managers to provide the default investment strategies, comprehensive public education, and consultation with payroll departments on who the administrative burden will mostly fall. Auto-Enrolment is therefore now expected to come into effect on September 30th 2025.
Isio’s view
Auto-Enrolment is overwhelmingly welcomed, particularly given the success in the UK and globally. The 6% matching contributions in 10 years’ time (with a 33% government uplift) will bring contributions well above the UK’s current Auto-Enrolment minimums and more in line with what we believe is a reasonable level of contributions to support retirement. The delays are understandable, but more clarity should be provided on the remaining design areas so that employers can plan effectively.
Why it matters
Auto-enrolment is delayed, but it is coming! It will have a cost and administrative impact on all employers and employees in Ireland. Employers should consider their Irish pensions strategy now and make sure the pensions in place are compliant before Auto-Enrolment arrives. This will help to protect employees from potentially worse off benefit solutions, attract and retain the best staff, and get ahead of a potentially clunky and burdensome Auto-Enrolment launch. As evidenced globally, this will have a huge impact on savers, and will completely change a developing benefits market.
Please get in touch with Edward.Andrew@isio.com to discuss what we are seeing in the market, the options that employers have available to them and the potential impacts and how best to prepare.
Get in touch
- The Government announces its Autumn Budget on 30th October, amid speculation that pensions tax could be an area the Chancellor targets. If you’d like to hear more on this topic, sign up for our webinar on Budget day, where we’ll be sharing our reactions to the Budget
- We’re hosting our “Accounting for Pensions” webinar in the coming months, covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list
- On Tuesday 19th November at 10.30am – 12:15pm, we will be hosting Isio’s annual Fiduciary Management Conference live from a London studio. Our expert speakers will be exploring how fiduciary managers have been rebuilding their propositions for this new era and will shine a light on the trends in the fiduciary landscape highlighting areas to be cautious of when using a delegated model. You can register for the conference here.
-
Change since 30 June 2024
Commentary
- It’s been a quiet quarter, and we don’t expect scheme’s funding positions to have changed materially either way in most cases.
- Gilt yields fell by c. 10-15 basis points over the quarter, with slightly lower falls of 5 – 10 basis points in long-term inflation expectations. As both these movements have been in the same direction they will largely offset each other for funding valuations.
- Equity markets were up slightly, with UK equity markets returning c1% over the risk-free rate.
- Credit spreads increased slightly (less than 5 basis points) over the quarter – and thus accounting positions may have improved slightly for most schemes.
-
New DB funding regime in force
Background
After many years of waiting, the new funding code has finally come into force and will apply to valuations with an effective date on or after 22 September 2024. The new code builds on the existing DB funding regime by requiring trustees and sponsors:
- to have a long-term plan to be at least fully funded on a basis that reflects a low-dependency investment strategy by the time their scheme is significantly mature; and
- to make sure their technical provisions reflect the journey plan to get there.
All of this will need to be documented in a new Statement of Strategy.
Isio’s view
With generally improved funding levels across UK DB schemes, the financial impact of the new funding regime may be less than first thought. The first valuations under the new funding code will however still require significant additional work in collaboration with the trustees. Those schemes with late 2024 and early 2025 valuation dates will end up acting as guinea pigs for the rest of the industry as it gets to grips with how the new requirements are applied in practice for the first time.
Why it matters
Sponsors should not rely solely on their trustees to understand and reflect the new funding regime at the next valuation. Sponsors should be:
- Thinking about what long-term objective to target, and the implications on the technical provisions.
- Confirming expected time to “significant maturity”, to understand how long you have before the long-term objective should be reached.
- Start thinking about employer covenant (now a legally defined term under the new regime) with future assessments to focus on company cashflows and “prospects”
- Consider whether to target the prescriptive “Fast Track” approach to minimise scrutiny from the Pensions Regulator, or the more flexible “Bespoke” approach.
Read more -
Virgin Media case
Background
In June 2023 the High Court judged that historic amendments made to the Virgin Media scheme between 1997 and 2016 were invalid unless Section 37 actuarial certification was obtained (and could be evidenced) – a ruling which was upheld by the Court of Appeal in July 2024.
This case has wider applicability to DB pension schemes which were contracted out between 1997 to 2016 – who could also find that historic amendments are invalid if they don’t have the appropriate documentation.
Isio’s view
This potentially causes a huge headache for sponsors and trustees alike. The nightmare scenario would be having to unwind historic amendments simply due to gaps in records, rather than because these changes didn’t meet the requirements for certification at the time.
Given the potential impact based on a technicality, various industry bodies are actively lobbying DWP to intervene on this issue and retrospectively validate historic amendments which met all the right conditions for actuarial certification at the time, but where evidence of this cannot be found. However, it remains unclear whether DWP will step in.
Why it matters
For DB schemes going through an insurance or M&A process, there is a more pressing need to understand any potential risks to the underlying obligations.
More broadly, auditors are already expecting further investigation into this issue to have commenced, ahead of their next reporting periods – doing nothing is not an option.
Finally, sponsors should try to understand any potential changes in benefit obligations – particularly if significant – as these could have funding implications as well as influence strategic pensions decisions.
We will be running a webinar in the coming months, on the implications of the Virgin Media ruling. If you’d like to receive an invite, please join our mailing list.
Join our mailing list -
Scheme run on survey of professional trustees
Background
With UK DB schemes better funded than they have been for decades, employers and trustees are considering whether to take the opportunity to move to insurance at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we surveyed 83 professional trustees responsible for over £350bn of DB assets to get their views on whether to run on and, for those schemes that do, how to implement this.
Isio’s view
Over two-thirds of professional trustees believe that the minimum member share of surplus to justify running on is 40% or less. This reflects the views expressed at our recent event for large sponsors that upside should be weighted towards employers who are responsible for funding 100% of any deficits that emerge.
Employers looking to run their schemes on can be encouraged that trustees are keen to work collaboratively with them. Their biggest concern is likely to be protection on insolvency which can be improved if necessary through contingent arrangements like escrows or parent guarantees.
Why it matters
Deciding whether to insure at the earliest opportunity, to run on over the longer term, or something in-between, will be the most financially important decision that most trustees and employers ever agree for their schemes.
The views of the sponsor are crucial – indeed the employers view scored as the most important factor for professional trustees in deciding whether to run on beyond full buy-out funding. However, trustees typically hold much of the power in agreeing the “endgame”, so sponsors need to understand trustee perspectives going into these discussions.
View the survey -
Managing tail risks
Background
Many pension schemes are now well funded and running low risk strategies, and modelled risks metrics like ‘Value-at-Risk’ give the impression that not a lot can go wrong. However, we know from experience that “out of model” risks can and do happen. Over summer, for example, there was significant volatility in Japanese equities – an event which had only a 0.00000000000000000000003% probability of occurrence, and was in the top 5 market movements of all time. Whilst most schemes have limited exposure to this market, it does highlight the potential remaining risk.
Isio’s view
Sponsors and trustees should consider the exposure of their schemes to out of model risks. This review should identify the “pinch points” and understand their impact if the unexpected occurs. Examples of such pinch points include defaults, liquidity, deflation, longevity and IT outages. Where pinch points are identified a plan can be formulated – either to remove the exposure or to improve governance in case the event happens.
Why it matters
If a scheme with 1% asset outperformance over its liabilities has a 10% hit to funding, it would take over 10 years to recover without re-risking or additional cash contributions. Understanding these types of risks means that sponsors and trustees can be proactive if they occur, giving them the greatest chance of mitigating the impact. The LDI crisis in 2022 was a great example of this, where those with clear pre-agreed frameworks generally fared better.
Please get in touch with Barry.Jones@isio.com to discuss how we could help you to identify and manage remaining risks in your pension scheme
Get in touch -
Irish Auto-Enrolment launch delayed again!
Background
Ireland is the only OECD country without an Auto-Enrolment (or similar) solution in place. The Government has been considering a solution for decades, and a 1 January 2025 introduction had been quoted. However, much remains to be done including a search for asset managers to provide the default investment strategies, comprehensive public education, and consultation with payroll departments on who the administrative burden will mostly fall. Auto-Enrolment is therefore now expected to come into effect on September 30th 2025.
Isio’s view
Auto-Enrolment is overwhelmingly welcomed, particularly given the success in the UK and globally. The 6% matching contributions in 10 years’ time (with a 33% government uplift) will bring contributions well above the UK’s current Auto-Enrolment minimums and more in line with what we believe is a reasonable level of contributions to support retirement. The delays are understandable, but more clarity should be provided on the remaining design areas so that employers can plan effectively.
Why it matters
Auto-enrolment is delayed, but it is coming! It will have a cost and administrative impact on all employers and employees in Ireland. Employers should consider their Irish pensions strategy now and make sure the pensions in place are compliant before Auto-Enrolment arrives. This will help to protect employees from potentially worse off benefit solutions, attract and retain the best staff, and get ahead of a potentially clunky and burdensome Auto-Enrolment launch. As evidenced globally, this will have a huge impact on savers, and will completely change a developing benefits market.Please get in touch with Edward.Andrew@isio.com to discuss what we are seeing in the market, the options that employers have available to them and the potential impacts and how best to prepare.
Get in touch -
- The Government announces its Autumn Budget on 30th October, amid speculation that pensions tax could be an area the Chancellor targets. If you’d like to hear more on this topic, sign up for our webinar on Budget day, where we’ll be sharing our reactions to the Budget
- We’re hosting our “Accounting for Pensions” webinar in the coming months, covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list
- On Tuesday 19th November at 10.30am – 12:15pm, we will be hosting Isio’s annual Fiduciary Management Conference live from a London studio. Our expert speakers will be exploring how fiduciary managers have been rebuilding their propositions for this new era and will shine a light on the trends in the fiduciary landscape highlighting areas to be cautious of when using a delegated model. You can register for the conference here.
Join our mailing list
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