New Year, Same You? – New Year’s (Pensions) Resolutions

Welcoming the New Year seems different yet somehow similar this year. Although it feels there is a brighter future on the horizon, we are not where we thought we might have been when gazing into our crystal ball this time last year. The same is true of the pensions industry.

At the beginning of 2021, we predicted what might lie ahead for the pensions landscape. Looking back, it is clear that good progress continued to be made in what was another extraordinary year: many schemes saw their funding levels improve; there was an increased move to reduce and manage liabilities; and there was a marked shift to be greener, undoubtedly helped by the COP26 summit, which is ongoing. These were three of our five predictions set out this time last year.

Yet there’s still plenty more to be done, and two of our five aims did not quite come to fruition: budgetary control, with many schemes and sponsors facing increased regulatory compliance creating budgets just as big as before; and member engagement, which will hopefully rise as Pensions Dashboards are set up. So, as is often typical with New Year’s Resolutions, there’s likely to be a repeat or carry forward of some pensions plans being made by trustees and other pensions professionals this year.

What “new” New Year’s Resolutions could trustees be setting for 2022, another year with uncertainty but where there’s more hope and expectation for better times ahead?

1) Strength of employer covenants – improve understanding
As companies continue to weather the pandemic, many of those who emerge from the storm are now able to forecast with greater certainty. This presents an opportunity for sponsors, trustees and advisers to learn from the last 18 months and develop further their understanding of the dynamics and risks within their covenant and factor it into their long term funding strategies.

This should help those schemes with 2022 valuations, in particular those still behind track in terms of their longer funding objectives and recovery plans, to reach more informed agreements that work for all stakeholders.

For sponsors adversely impacted by the pandemic, trustees should consider whether they are still comfortable the employer has a long term future and how that outlook might have changed, particularly where there has been structural changes on their markets or new entrants where more fundamental changes are required to survive. Where companies have cited the pandemic as the cause for variances in their financial results, trustees and their advisers need to be sure that this was the main driver as opposed to other underlying factors.

The new requirement to include trustees’ employer covenant grading in 2022 scheme returns focusses the mind further on having sufficient understanding of the rationale behind those ratings.

2)  ESG – focus on more than just being green
ESG continues to sit centre stage on the agenda for UK pension schemes, in respect of both assets and covenant and for both DB and DC arrangements. With E (environmental) having rightly had some priority in previous years and G (governance) being the most developed, the 2022 focus needs to also turn to the S (social) in ESG – the social aspect of sustainable investing: how companies manage their relationships with employees/suppliers/customers, the societies in which they operate and the political environment.

Following the paths of the £5bn+ schemes and master trusts last year, trustees of schemes with assets of £1bn-£5bn should turn their attention to the climate governance requirements that they are required to comply from 1 October 2022, with a 2023 deadline for producing their TCFD reports: Task Force on Climate-related Financial Disclosures, which will require significant set-up, monitoring and modelling of a strategy to address and disclose companies’ climate-related risks and opportunities. For those schemes with assets under £1bn, you can guess what one 2023 resolution might be!

Clearly it’s far more than about just the reporting. Collectively invested assets of pension schemes are big enough to drive fundamental changes across the UK and globally to help tackle climate change and third world poverty.

3) Governance – make the most of the new requirements
With the introduction of TPR’s new single code of practice comes additional new legislative requirements for trustees, including the ESOG (Effective System of Governance) and Own Risk Assessment (ORAs). If not already started, 2022 is the time for trustees with their advisers to review whether they have the 30+ required policies in place and whether current policies: capture the requirements of the code; are used or referred to in decision making; and have been reviewed within three years. Here at Ross Trustees we have created and implemented a tool for schemes to achieve this easily, which results in an overall governance score as well as a score for each of the four ESOG categories.  We have also produced a comprehensive suite of polices that can be adapted to individual scheme needs.

For those schemes who have already completed a review, 2022 is a good opportunity to either update existing or put in place new policies, perhaps starting with those that could have the greatest impact on members – such as Business Continuity Plans and Cyber Plans.  It is also a good time for trustees to review their knowledge and understanding requirements and put in place training plans to fill any knowledge gaps brought about by the new code.

It is welcomed to see the code covering Diversity and Inclusion, such as considering inclusivity in member communications. This will lead to many trustees reviewing their communication strategies: Are they up to scratch? When was the last time the trustees considered format, inclusivity, accessibility to all members?

Underpinning all of this is a resolution to make governance more than a “tick box” exercise, to raise the bar further by implementing new processes and new ways of thinking and working.

4) Online meetings – fully utilise the technology
With seven rounds of quarterly online trustee meetings behind us – and more in front of us, particularly with the latest work-from-home guidance – 2022 provides an opportunity for trustees, sponsors, advisers and members to fully embrace the technology available. Online meetings are here to stay, so it is not sustainable to continue to make do when they do not work as well as they could. We should be challenging ourselves on what changes can be made – and what technology enhancements are needed – to enhance meeting experience for all attendees, whether in person, online or a combination of the two (hybrid). Even planned in person meetings typically evolve into a hybrid of some people in the room and some on the screen.

Board software can be used to streamline meetings and for online decision making. If not already doing so, pension scheme information can be stored and trustee decisions made and tracked online, driving through efficiencies and future-proofing by having documents easily accessible in one place.

Townhall meetings with members or multi-employer scheme representatives can take place far easier online. These could also help with the carry forward resolution from last year of reconnecting further with our scheme members.

Driving through your resolutions

Whatever your New Year’s Pensions resolutions, the challenge as we know is how to ensure we achieve them. Our best hope is for trustees to communicate what they are and then regularly review these objectives, working collaboratively with sponsors, advisers, regulatory bodies and – most importantly – our members.   Here’s to a successful, and safe, 2022 for everyone.

This article was first published in Professional Pensions, January 2022

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