Events in financial markets over the past two years have resulted in funding improvements for many schemes. The Pension Protection Fund’s (PPF) analysis (included in the PPF’s 2023 Purple Book) shows that the number of schemes in or close to a surplus on a buy-out basis has increased dramatically.

It’s safe to say that the environment for DB schemes is very different to what it was a few years ago. As a result, many trustees and sponsors will be looking to revise or adjust their strategies. In the meantime, regulators are looking to understand if and how to take these changes into account when deciding on how DB schemes should be governed. There’s a packed agenda of upcoming regulatory change and consultations, though it remains to be seen whether political changes might derail current plans.

We cover all this in our 2024 DB Outlook – our overview of what trustees and sponsors should be looking out for and planning towards in 2024.

Putting endgame planning in the spotlight

As many schemes are better funded, trustees and sponsors are likely to be reviewing endgame objectives. Buy-out is likely to be the preferred route for many schemes, but some trustees and sponsors may feel that another option may be more compelling.

Alternatives to buy-out were in focus in the Chancellor’s recent Autumn Statement. As well as cutting the tax on surplus refunds, the Chancellor announced that the Department for Work and Pensions (DWP) would consult on measures to make surplus extraction easier, which could lead more sponsors to run on rather than buy out. And with Clara-Pensions successfully completing its first transaction in 2023, more superfunds or alternative risk transfer solutions could enter the market in 2024. The PPF could set up a public consolidator for small schemes which are unserved by the market, though this won’t be up and running before 2026.

Action: Whatever the preferred endgame objective, it’s imperative that trustees and sponsors have a clear vision of the steps needed, can monitor progress and have the information that enables them to act and adjust plans in response to unforeseen events. For those heading towards buy-out, our interactive guide helps trustees and sponsors map out a comprehensive plan to reach buy-out confidently and efficiently.

Revisiting cash flow management

It’s worth remembering that the ultimate reason why pension schemes exist is to pay members their promised benefits as and when they fall due. As trustees and sponsors come together to review the endgame objective for their scheme, those members’ benefits still need to be paid in a timely and cost-effective way. Furthermore, as funding positions have improved materially for many schemes in recent years, contributions are likely to play a lesser role in plugging the cash flow funding gap.

It’s not news to people that pension scheme outgo will increase as schemes mature, and indeed many will have plans in place to respond to this. However, this will have a baked-in assumption about the extent to which cash flows will be met from contributions coming in. For many schemes that have experienced a funding improvement, a reduction in contributions may follow as actuarial valuations take place over the next 12–18 months. This will leave a hole in their cash flow plans and could result in forced selling of assets that they didn’t not otherwise want to sell.

Action: Trustees should revisit their cash flow policies and plans, consider whether they have sufficient sources of income from existing assets and to what extent are their plans rely on contributions from the sponsor. As part of those deliberations, trustees should revisit their existing cash-flow-driven investments and consider whether there is any action that could or should be taken to evolve these. An essential part of this analysis will also be considering the scheme’s cash flow profile and whether it has changed in light of current market conditions and the opportunities that are available.

Giving your data a spring clean

As schemes edge closer to buy-out, many trustees are starting to get scheme and member data ‘buy-out ready’. Absent or incorrect data could compromise a scheme’s chances of getting to market and positioning itself as attractive to insurers. Planning this activity carefully alongside projects such as GMP equalisation and preparing for pensions dashboards will be important.

Action: Schemes that have good-quality data are ready to approach the market and have a better chance of getting a good deal. However, with finite resource in the industry, it’s likely that trustees will have to compromise on some of the day-to-day work or scheme events to give priority to data work. Considering these items as early as possible allows decisions to be taken on the necessary cleansing activity and how that sits within the wider journey plan.

Getting ready for the new DB funding code

The Pensions Regulator (TPR) has been consulting on its new DB funding code for some years, and 2024 may be the year that it comes to fruition. In recent months TPR has announced that the new regulations will be introduced in early 2024, although they’re unlikely to be effective for schemes until the autumn when the final code is published.

The draft code (which sets out how the regime is expected to operate) was released at the end of 2022. However, the industry still awaits detailed guidance in several areas, such as the calculation of maturity and the format of the statement of strategy. Many were concerned about the rigidity of the code and regulations, particularly the implications for investment strategy and schemes that are open to new members. We expect to see areas of the final regime updated for this feedback as well as aligning this with changes to the DB pensions landscape and themes from the government’s ‘Mansion House reforms’.

Action: The industry expects TPR to announce the final regime in 2024, and so trustees and sponsors should keep a watching brief. In the meantime, our case study guide should help trustees and sponsors understand what these reforms could mean in practice, including the issues they might face and the potential challenges ahead. Schemes with valuations in the second half of 2024 should pay particular attention.

Enhancing governance under the new general code of practice

As with the new DB funding code, TPR’s new general code of practice was subject to several delays but was eventually presented to Parliament on 10 January 2024.

The general code consolidates and updates several of TPR’s codes of practice, mainly those dealing with governance and administration. One of the major new items is the Own Risk Assessment (ORA), which requires trustees to evaluate how effective their system of governance and risk controls are. The final code confirmed that the ORA must be undertaken at least every three years instead of annually, as proposed in the draft version.

Action: The delays to implementation have given schemes time to prepare, so many schemes are probably well positioned for when the code is expected to come into force in late March 2024. For those that aren’t, trustees should undertake a gap analysis at the earliest opportunity to understand what they need to do to meet the TPR’s expectations. 

Other items on the horizon

Although they didn’t make our top five, we can think of several other items that trustees and sponsors may wish to consider in 2024.

• Mortality assumptions. The long-term impacts of Covid-19 on longevity are still not clear, so trustees of schemes with valuations in 2024 need to carefully consider the mortality assumptions they adopt and the weighting to place on recent experience.
• Section 37 confirmations. Trustees should watch out for the appeal in relation to the judgment for Virgin Media Limited vs NTL Pension Trustees II Limited. In June 2023, the judge found that amendments made to the scheme were void because the actuary had not provided the Section 37 confirmation that the scheme would continue to satisfy the relevant statutory standard after the amendment was made. This could have wide-reaching consequences for schemes, so trustees should keep up to date with the latest position.
• Cyber security. TPR has recently updated its cyber security guidance to help tackle the ongoing threat posed by cyber criminals, urging trustees to report significant cyber-related incidents. With these types of incidents on the rise, trustees should ensure those handling data or managing technology on their behalf have controls in place to reduce the risk of incidents occurring.
• Diversity and inclusion practices. In March 2023 TPR published guidance to help improve pension schemes’ equality, diversity and inclusion (EDI). This guidance suggests that schemes should have an EDI policy in place, including goals and objectives to achieving a diverse and inclusive governing body.
• Lifetime allowance. As announced at the Spring Budget 2023, the Chancellor confirmed in his Autumn Statement that the government will introduce legislation to abolish the lifetime allowance with effect from 6 April 2024. Trustees should work together with their administrators over the coming months to ensure member communications are updated to reflect this.

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.

*updated 16 January 2024

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.