April, 2020

Welcome to MHM’s revamped Pension Connections. We’ve given our newsletter a new look and a new writing style, which we hope you will find informative and easy to read.

We would welcome any feedback you may have.

There is obviously only one real story dominating all our lives at the mo-ment – coronavirus – which features in all of our articles in this issue. We hope all of our readers and their families are staying well and managing to carry on within the restrictions that we are all coming to terms with.

Issue: 10

In this issue:

Pensions and the coronavirus

The Pensions Regulator publishes the first stage of its major consultation on a code of practice on defined benefit pension funding

Dun & Bradstreet goes back into part-nership with the Pension Protection Fund

New accreditation scheme for profes-sional independent trustees is finally launched

MHM’s regular market data and com-mentary

Pensions Regulator issues coronavirus guidance

A new look for Pension Connections

The Pensions Regulator (TPR) has issued guidance for pension scheme trustees, employers and administrators as the corona-virus pandemic continues to disrupt the UK’s economic and social wellbeing.

Acknowledging that trustees, employers, administrators and savers were facing “unprece-dented, challenging and uncer-tain times”, TPR advised that their activities should be fo-cussed on the key risks to pen-sion savers, including:

• pension benefits needing to be paid to members

• the risk of scams needing to be minimised

• employers needing to con-tinue contributing

• savers needing support to make good decisions in challenging circumstances

TPR added that it would main-tain a proportionate and fair approach to any action it may take, should administrative breaches of the law occur. (Continued on page 2)

PensionConnections

Pension Connections

Pensions Regulator issues coronavirus guidance

Trustee accreditation regime starts

(Continued from page 1)

And it gave reassurance that it was closely mon-itoring the COVID-19 situation and working with government regulators and other bodies to assess the most immediate risks to pension schemes.

MHM approves of the pragmatic approach taken by TPR, and it is no surprise to see the regulator focus on the continued ability and willingness of the employer to provide financial support to schemes, with short-term cash flow likely to be a major concern for many firms.

Whilst there is a suggestion of greater leniency being afforded to schemes, in its briefing pub-lished on 27 March TPR stated that “we are not authorising, encouraging or compelling a partic-ular course of action - we expect trustees to do the right thing for their situation and members”.

MHM’s view is that trustees of DB schemes will need to act quickly in response to requests for help from the employer and, where appropriate, be open to deficit contributions being suspend-ed and/or scheme expenses being met from the scheme on a temporary basis.

Those schemes with an actuarial valuation in

progress or soon to start, should also look out for the regulator’s Annual Funding Statement, due to be published “after Easter”, which will include messages relevant to all DB schemes, but particularly those with valuation dates between 22 September 2019 and 21 September 2020.

For DC schemes, last month’s guidance from the regulator en-couraged trustees to think about how members might react to falls in fund values and a loss or reduction of earnings, which could lead them to make inappropriate decisions and leave them more open to be exploited by scams.(Continued on page 3)

The new accreditation regime for professional independent trustees will be up and running in the near future after a 12-month delay.

Two routes will be open to professional trustees seeking accreditation - the Pensions Management Institute (PMI) and the Association of Professional Pension Trustees (APPT).

The PMI has launched a new certificate in pension trusteeship to accompany the existing award in pension trusteeship and the APPT is expected to launch its own accreditation regime shortly.

MHM client directors are already well on the way to achieving the new require-ments and we will be looking at the options to complete the accreditation process in the coming weeks.

April, 2020

Major DB funding code consultationThe Pensions Regulator (TPR) has published the first stage of its major consultation on a revised code of practice on defined benefits (DB) pension funding.

TPR is proposing either a ‘fast track’ or a ‘bespoke’ option for completing an actuarial valuation, both of which will enable schemes to meet their legal obligations. If it can be demonstrated that the valuation meets TPR’s compli-ance guidelines, then trustees can take the more straight-forward, but prescriptive, fast track approach for their scheme.

For those who cannot or choose not to meet the fast track requirements, the bespoke approach will offer greater flexibility.

However, trustees will have to submit more supporting evidence on their approach, including how they propose to manage additional risk. They may receive greater reg-ulatory scrutiny.

TPR executive director of regulatory policy, David Fairs said: “We want to make sure pensions have the neces-sary long-term approach to ensure savers get the benefits they expect. We are setting out our expectations about how trustees should manage risks in an integrated way when planning their scheme’s long-term funding and in-vestment strategies.”

The consultation was scheduled to run until 3 June with a second stage planned for the end of the year. However, TPR has, understandably, prioritised actions in response to the pandemic, so the initial consultation timetable will be extended to 2 September, with further progress after that likely to be in 2021.

Pension Connections April, 2020

Dun & Bradstreet back in PPF roleDun & Bradstreet (D&B) has returned to the role of insolvency risk partner to the Pension Protection Fund (PPF) after a six-year absence.

The data, analytics and insights company will be adopting the PPF’s bespoke model for calculating insolvency scores, rather than using its own commercial model, which was the source of some controversy when it last had the role.

Whilst there will be some continuity through the transition from current partner Experian to D&B, it is still likely that a number of schemes will notice a change in the insolvency scores for participating employers and guarantors, with a minority likely to experience a “significant change”.

This is partly due to differences in the way that Experian and D&B collect data and to D&B’s recalibration of the model to reflect recent insolvency experience.

The largest companies are likely to see the most significant in-crease in risk-based levies, with smaller companies and not-for-profit organisations expected to see a reduction in their levies.

However, this is before the effects of coronavirus are felt in both UK and international businesses. The full impact of the pandemic will only become apparent in the months (and years?) ahead.

The D&B online portal is now available alongside the one for Experian, so employers and trustees can look at both and see any differences that may exist. The new regime starts in April 2020, with the first levy invoices based on the D&B scores being those due to be issued autumn 2021 for the 2021/22 levy year.

(Continued from page 2)

Trustees should also review any previously agreed invest-ment and risk management decisions to be implemented in the future, to ensure they remain appropriate, efficient and do not introduce risks or crystallise losses.

In particular, trustees should focus on their scheme’s de-fault investment strategy, which is likely to apply to a sig-nificant proportion of the membership.

Finally, TPR has announced an easement (until 30 June 2020 initially) for employers wanting to reduce pension contributions for furloughed staff. Although some condi-tions apply, it will be possible to reduce contributions to the statutory minimum without first having to go through

Market data to 31 March 2020The investment statistics show the performance of the major asset classes for periods to the end of March 2020. How different the position would have been had we been showing figures 3 months earlier, on the back of strong returns for most markets during calendar year 2019.

Clearly, with the onset of the coronavirus pandemic, the global economy and investment markets have changed beyond rec-ognition over a very short period of time, with further upheaval still to come. The statistics to the end of March 2020 are very sobering, particularly for those invested in growth assets.

However, it should be remembered that many DB schemes have introduced Liability Driven Investment (LDI) over recent years so, whilst the fall in bond yields will result in a sharp increase in the value of liabilities, schemes that have introduced hedging through LDI will have some degree of protection against this. Of course, many schemes retain holdings in growth assets (for per-fectly good and sensible reasons) and these assets offer no such protection – a stark reminder of the meaning of investment risk!

There is usually a choice of investment options, but most members of most DC schemes will be in the default investment strategy. Whilst there are many variations in the design of the default, a common approach is for such funds to include a “growth” phase, with assets generally invested in equities, before moving into a “protection” phase in the years preceding the member’s expect-ed retirement age. It is often members closest to retirement that are most concerned about investment risks, but a well-designed default strategy should ease these concerns.

For DC members who are still in the growth phase, there may be little or no protection from market volatility, but retirement could be many years away and pensions are a long-term investment! If the default fund is invested in equities, funds will have declined in value but, if contributions are still being paid, they are now being invested in cheaper assets than was the case only a few weeks ago and, when markets recover, the former value should be returned.

Obviously, not all schemes are the same and not all members will react in the same way, so employers and/or trustees need to assess the impact on their scheme’s performance - particularly the default option – and consider a communication to members with some appropriate words of comfort and/or information about how to obtain further information.

MHM Pension Services LtdWindsor House, Cornwall Road, Harrogate HG1 2PW

01423 229029info@mhmpensions.co.ukwww.mhmpensions.co.uk

MHM Pension Services Ltd is authorised and regulated by the Financial Conduct Authority. The articles and information included in Pension Connections are

intended for information only and should not be construed as advice on any particular course of action for your company or pension scheme.

Pension Connections April, 2020

Figures supplied by Barker Tatham Investment Consultants: BIG THINKING for small schemes