Bob Scott discusses the key issues brought up at the recent LCP Pensions Conference.
The theme for our 2015 pensions conference was "Turning uncertainty to your advantage - making sense of the pensions world in 2015 and beyond". Held at the London Hilton Hotel last week I was delighted to see more than 200 delegates including trustees, pensions managers, and employers with UK pension schemes in the audience.
Crispin Odey, founding partner of Odey Asset Management, opened the conference by warning that there was a "recession every decade and we are due ours now". He pointed to artificially low interest rates driven by Quantitative Easing; worrying developments in China; and significantly overvalued stock markets as signs that there is more bad news to come.
Our expert speakers urged delegates to think long-term, ie beyond the next three years, when looking at their pension fund valuations but to consider taking action now on investment de-risking, longevity hedging and governance.
With well over £1 trillion of pension scheme liabilities chasing a limited supply of low-risk matching assets, competition will drive yields lower and prices higher.
Therefore, even schemes that do not intend to de-risk for some years might be advised to start gradually buying matching assets now so as to average the cost over time.
Similarly, with the supply of longevity hedging limited by the size of the reinsurance market, schemes could dip their toes in the market by doing incremental buy-ins. These might include: a medically underwritten buy-in of the highest paid pensioners; a deferred buy-in where the policy covers payments due, say, after five years; or, for the largest schemes a captive longevity swap.
With interest rates at such low levels, squeezing an extra 0.5% or 1% per annum out of your existing assets can make the difference between reaching your target in 15 years rather than 20 - or not at all. Delegates learned a number of ways in which schemes could achieve such incremental returns.
These included: dynamic liability-driven investment where the manager switches between different matching assets depending on which is offering the higher yield at any point in time; taking advantage of the "illiquidity premium"; and seeking property investment in, say, Nottingham rather than central London.
Good governance covers a wide range of subjects. Efficient decision-making -perhaps using an independent professional trustee - so that trustees can take advantage of opportunities as they arise as well as having ready access to up-to-date information without having to rely on third party providers.
Hurdles to be overcome included: competition - lots of schemes are trying to do the same things; political interference (eg from further EU legislation); and the utter confusion over pensions taxation which one of LCP's tax experts, Karen Goldschmidt, helped to demystify during her presentation.
On the other hand, the pension freedoms unlocked in George Osborne's 2014 budget provide opportunities for members, trustees and employers to get a better outcome. The conference heard that, despite reports of one individual blowing £1.3m pension savings on four sports cars, pension freedoms have yet to take off although members are aware that "something big has happened".
Each speaker set out a clear action plan at the end of their session which encouraged delegates to take actions as a result of their attendance.
We had two lively Q&A sessions at which delegates showed particular interest in innovations in the buy-in market. Michelle Wright's answers gave further insight into the practical considerations behind such transactions.
If every member of the audience took away just one action point to help them navigate through an ever changing and complex pensions landscape, I'm happy that the conference was a success.
Bob Scott is a senior partner at LCP
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