Hymans Robertson Hopes and Predictions for 2023

Commenting on her hopes for 2023 for DB Pensions Schemes, Susan McIlvogue, Head of DB Pensions, Hymans Robertson says:

“2022 proved to be another eventful year for the pensions world. Whilst interest rate expectations have eased back, inflation is rising and against this backdrop it certainly feels like a new era for DB pension schemes. For Trustees, attention should be turning to reviewing collateral waterfalls, investment strategies and funding plans. With many schemes in a position where their actual asset allocation bears limited resemblance to their strategic benchmark, testing and rebalancing (or indeed resetting), strategy will be important. 

“Whatever might have happened to a scheme‘s technical provisions funding position, it’s likely that funding on an insurance buy-out basis will have improved significantly. This means that many schemes may find that buy-out affordability is now much closer than expected. Those thinking about doing a partial buy-in will need to reassess plans and available capital in light of investment strategy discussions. Whilst schemes can’t insure liabilities overnight, irrespective of how well funded they may be, if buy-out is now within reach there’s no better time to start preparing. As well as looking to lock-in gains, trustees should also consider pushing on with buy-out ‘readiness’ actions.

“As we head towards the end of 2022, we anticipate an early Christmas present from the Pensions Regulator, in the form of the long awaited draft DB funding Code, with fast-track and bespoke routes to compliance. The Regulator has made encouraging noises about listening to industry criticism of the proposals, learning from the experiences of the Covid 19 pandemic and more-recent market volatility, to shape its remit. However, its hands will be tied by the DWP’s forthcoming Funding and Investment Strategy Regulations, the first draft of which was worryingly prescriptive, with the potential to increase systemic investment risks and have a cash impact on some businesses and jobs. Although, both the Code and legislation are expected to come into force in late 2023, affecting valuations with effective dates thereafter, they will also influence earlier valuation deliberations.”

Mark Jaffray, Head of DC Consulting at Hymans Robertson reviews next year’s priorities:

“My hope is that 2023 will be the year that a member outcome focus is cemented into the DC workplace market. With the cost of living crisis continuing to dominate, and inflation and interest rates likely to be at higher levels than we have been used to in recent years, it will be key that the pensions industry finds ways to remind members of the value of long-term pension savings. Ongoing trends such as consolidation into master trusts, and an emphasis on sustainable investing, will continue at pace. It will also be crucial that value, rather than costs, drive decision making given the potential that exists to materially improve outcomes. Illiquid investments also have the potential to improve these outcomes substantially, particularly for younger members. I am also hopeful that more hybrid decumulation investment strategies are developed to better match the needs of those reaching retirement now. With the introduction of these more complex options, however, we will need to see the evolution of education and support. There has been slow innovation in digital strategies to help inform and engage members, so I would like to see the pace of this innovation ramp up through 2023.

“When it comes to DC scheme governance, in 2023 trust-based DC schemes will finally need to get to grips with the Single Code of Practice as it comes into force. Key challenges will be navigating overlap with the Chair Statement, clarity over exemptions for Master Trusts and whether the substance is genuinely being covered elsewhere, and truly understanding what an ‘Own Risk Assessment’ is all about. We already know there will be a further upping of the game on Value for Members as TPR and FCA present a more joined up approach to the definition of value. We expect to see a widening of the Enhanced Value for Members Assessments to schemes above £100m. The need to benchmark all aspects of trust-based schemes against master trusts will therefore increase.”

Commenting on the main investment issues for the year ahead, Elaine Torry, Co- Head of DB Trustee DB Investment, Hymans Robertson says:

“While 2022 has been full of challenges for consumers, businesses and investors, funding positions have, in general, improved over the last 12 months. In terms of asset performance, a number of schemes will have seen meaningful double-digit negative returns from their bond assets, which will be the first time many trustees will have experienced this. Some schemes will have found themselves moving from a position of being a controlled and measured seller of assets supporting hedging arrangements in the first nine months of the year, to becoming a forced seller of assets due to liquidity rather than strategic considerations in the last three months or so. Many will now be in a position where their actual asset allocation bears almost no resemblance to the strategic benchmark that was set at the start of the year.

“As we look forward to 2023, collateral sufficiency will be a key priority. This is likely to include creating or revisiting a liquidity waterfall (a plan that sets out in advance which assets should be sold, in the right order). That would include factoring in the speed, cost and impact of volatility when selling assets, together with reviewing hedging levels and the ability to manage leverage and new collateral requirements. Another area of focus should be testing the strategy, with a view to rebalancing or resetting it. This could include issues of diversification, balancing the risk and return of assets with funding level volatility and meeting cashflow needs while avoiding idle cash balances. Lastly, we expect to see a focus on integrating Responsible Investment (RI) considerations while rebalancing and redesigning investment strategies.“

Commenting on her hopes for 2023 and the LGPS, Catherine McFadyen, Head of LGPS Consulting, Hymans Robertson says:

“For the LGPS, the end of 2022 means the valuation year in England & Wales will begin to draw to a close but that doesn’t mean the work will stop. There will be various sweep-up actions needed and 2023 may afford time to consider areas of strategy and risk management such as employer-level investment strategies and enhanced exit planning for employers close to exit. Meanwhile in Scotland, the valuations are just beginning and there will be significant decisions for funds to make around the balance of investment risk, employers contributions and funding prudence. whilst it’s not what many want to hear, we foresee high inflation and ongoing market volatility as likely to continue in 2023. LGPS funds will need to think about how they monitor and manage these risks, particularly for employers with shorter-term time horizons and those with weaker financial covenants. We may start to see the recent new flexibility powers being used in these situations and formal monitoring arrangements, supported by digital technology, being put in place.

“As we enter the new year, administration challenges will continue to be at the forefront of Pension Mangers’ minds, with deadlines in relation to the Pensions Dashboard and McCloud becoming ever closer at a time when the LGPS continues to find resourcing a challenge. The need to do more with the same, or in some cases less, resource will see funds taking difficult decisions, heightening the need for good governance, knowledge and understanding at all levels within a fund. We hope to see implementation of TPR’s Single Code of Practice and the E&W SAB Good Governance Project recommendations and, in particular, the consultation around a proposed new requirement that each fund have a workforce plan. Workforce planning could be an opportunity to take an LGPS-wide approach, if not to current resource challenges, then to those which may arise in future as member and employer needs change and increased automation are implemented.”