2022 proved to be another eventful year, with extreme market turmoil presenting new challenges for many pension schemes. Now that the year is coming to a close, we’d like to take stock of the current position and what might be to come in 2023. It’s from this place that we bring you our 2023 DB Outlook – our overview of the things that trustees and employers should be looking out for and planning for over the course of 2023.

Navigating the changing investment landscape

Events over recent months have been nothing short of extraordinary. Long-term gilt yields surged to levels unseen since 2008 and inflation (RPI) is the highest it’s been for around 40 years, not forgetting the bond market turmoil immediately following Kwarteng’s mini-budget. Whilst interest rate expectations have eased back for now, inflation is forecasted to stay high for a while longer (although for how much longer is a cause for debate – see our latest InflationWatch). Many will be asking whether the era of respectable growth rates and low inflation have finally come to an end. Whilst there are many unknowns, this certainly feels like a new era for DB pension schemes. For further insight into our thinking for the months ahead, read our latest issue of Investment Perspectives.

Action: Having navigated the market turmoil of 2022, trustees’ attention should be turning to their collateral waterfall arrangements, 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), the strategy will be important.

Rerouting your path to buy-out

The events in financial markets over the last 12 months are likely to have resulted in a significant improvement in funding position on an insurance buy-out basis. This improved position 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. 

Action: Whilst schemes can’t insure liabilities overnight, irrespective of how well funded they may be, if buy-out is now looking to be within reach then there’s no better time to start preparing. As well as looking to lock-in gains, trustees should consider pushing on with buy-out ‘readiness’ actions, including focusing on benefit specifications, data cleansing and GMP equalisation. The risk transfer market looks set to continue to be busy throughout 2023 so it’ll pay off to plan ahead. For smaller schemes, knowing which insurer to approach will become increasingly important, as insurers in that part of the market look for exclusivity on the transaction.

A new DB Funding Code

Following the Department for Work and Pensions’ recent consultation on draft regulations, the Pensions Regulator’s second consultation into the funding Code of Practice is expected to land any day now – perhaps an early Christmas present? The draft Code will set out how the Code is expected to operate in practice, including final details of the proposed ‘Fast Track’ and ‘Bespoke’ approaches to compliance. With a two year wait since the first consultation – spanning the COVID-19 pandemic and recent market volatility – it remains to be seen how much thinking has evolved and how the Regulator will address specific concerns including the extent of bespoke flexibility and treatment of open schemes. It will also be accompanied by refreshed guidance on assessing employer covenant. If the Regulator’s plans stay on track, the Code will launch in late 2023.

Action: Once the second consultation is launched, trustees and sponsors should benchmark their current approach against the Regulator’s finalised expectations. Working collaboratively to review long term plans and identify a preference for fast track or bespoke compliance will be important. If schemes have a valuation in early 2023, the Code won’t yet be enforceable, but it’ll be difficult to ignore.

D day for Pensions Dashboards?

Pensions dashboards will bring about a landmark change in the way individuals can access information about their pensions. For the first time, savers will be able to see most of their future pension information online and all in one place. Whilst much of the detail is still in development, large schemes such as master trusts will start to connect in spring 2023, with most schemes due to connect from 2024 (further information on staging deadlines can be found in our publication). Small schemes (with fewer than 100 members) are currently not in scope, although may be included in future legislation from 2026.

Action: With 2023 looking to be the year dashboards finally launch, schemes with staging dates in 2024 and beyond will be watching with interest to see how smoothly the first onboarding round goes. In the meantime, trustees can start talking to their pensions administrator and software/IT suppliers to understand their plans and decide how to connect. Schemes will need to ensure data is available, accurate and accessible. If the scheme is conducting any other data projects (for example GMP equalisation or risk transfer exercises) this may be an opportunity to consider dashboard requirements at the same time.

A new consolidated Code of Practice

It’s been over a year since the Regulator held a consultation on the draft content for a new Code of Practice. The consultation noted a move to replace ten of the fifteen existing Codes (those dealing mainly with governance and administration matters) with one single consolidated Code. One of the major new items is the Own Risk Assessment (ORA) whereby trustees will be required to evaluate the effectiveness of their system of governance and the efficacy of the risk controls in place. Delayed by the recent government upheaval, we understand the Code will be laid in parliament early in the new year.

Action: Demonstrating compliance with the new Code is no small task. If trustees haven’t already, they should undertake a gap analysis to understand the work that is needed to meet the Regulator’s expectations. Although the Regulator has said that there is no formal grace period for compliance (unless explicitly stated otherwise, for example the ORA is within 12 months), practical reality means that schemes should aim to at least have a plan in place to fill identified gaps from day one.

Other items on the horizon

Although they didn’t make our top five, there are a number of other items that trustees and employers may wish to consider in 2023.

Exploring whether sole trusteeship is the right governance model for your scheme – The number of schemes governed by professional corporate sole trustees looks to be on the rise and this is likely to be a trend that continues in 2023. Whilst sole trusteeship can provide benefits to some schemes, it is important for employers to appropriately test the suitability of the governance model for their scheme in advance of any changes.

Considering whether consolidation improves results for members – Despite many forms of consolidation having existed for decades, the industry-wide drive and regulatory push to lower costs, reduce risks and improve member security has triggered demand for consolidation solutions. Clara-Pensions is one such solution and after getting regulatory authorisation in late 2021 could be set to complete its first transaction in 2023.

Improving diversity and inclusion practices within your scheme – Earlier in the year, the Regulator published their Equality Diversity and Inclusion (ED&I) action plan to improve diversity and inclusion across trustee boards. The action plan outlines the measures the Regulator will take to motivate and assist trustees in hiring diverse candidates and fostering an inclusive workplace. The Regulator will be issuing an ED&I survey to trustees during 2023 to support their strategy and improve data on this important aspect of scheme governance and board effectiveness. We also anticipate additional Regulator guidance over 2023.

Moving forward with GMP equalisation – GMP equalisation has picked up momentum over the last year as more schemes started to assess the availability of their data and looked at assessing the different approaches to equalisation. Expect this to continue over 2023, as trustees look to implement GMP equalisation in a proportionate and cost-effective way.

Addressing climate change risks (and opportunities) – We are seeing many trustees starting to make progress in this area and expect this to continue in 2023 as developments are made in areas like setting climate metrics and targeting net zero. Climate-related disclosures will also be required of more schemes – whilst trustees of schemes with assets of £5bn were required to report under the Taskforce on Climate-related Financial Disclosures (TCFD) requirements in 2022, in 2023 the spotlight will move to those with assets with at least £1bn of assets. Read our Getting Ready for TCFD guide for more information.

With all this change on the horizon, understanding the potential implications and building this into future work plans is a good first step. Please contact your usual Hymans Robertson consultant if you would like to discuss these issues further. In the meantime, we hope you have a lovely festive season.