2019 was a busy year on many fronts, and pensions was no exception. Paul Kitson gives his top ten predictions for the pensions industry in 2020.
1) First signs of an emerging pensions crisis? - In November 2019, a G30 report highlighted the pensions crisis that many countries will face with pensions savings and state retirement provision projected to lag significantly behind retirement needs. The UK is likely to be at the forefront of this and 2020 could see the first of the ‘lost pensions generation' - those with only defined contribution (DC) provision - coming to retirement age to discover their pension savings will mean they either have to work longer or have much less in retirement than they hoped.
2) Cross-party collaboration - therefore I hope 2020 will see cross-party and cross-industry groups working together to solve these issues. As the G3o report laid bare, there are no easy wins, and no single policy decision will solve the retirement saving crisis on its own. As we saw with the Women Against State Pension Inequality (WASPI) campaign during the election, pension change is highly emotive and tough decisions may have to be made - this will only be possible with collaboration and cross-party support.
3) RIP RPI - 2019 saw the UK Statistics Authority (UKSA) calling for an end to the Retail Prices Index (RPI) by changing the formula to equal Consumer Prices Index (CPI). This has already had an impact on RPI-linked asset pricing and on defined benefit (DB) pension scheme liabilities (creating winners and losers depending on the level of inflation hedging and whether schemes had already moved to CPI). The UKSA can alter the RPI formula unilaterally from 2030, but January will see consultation on whether this should happen sooner, potentially in 2025, and we may also see more on the question of whether holders of index-linked assets will be compensated for the change. With an increasingly vocal group calling for RPI to be set to CPI ‘plus a margin' to compensate for the change, the death throes of RPI are not yet over and there may well be some twist and turns for both assets and liabilities yet to play out.
4) DB vs DC vs CDC - As anyone who follows John Ralfe and Kevin Wesbroom on Twitter will know, the debate around the relative merits of collective DC vs DC rage on. 2020 seems like the year the pensions industry needs to make its mind up on whether ‘middle ground' solutions such as CDC (or its variants) have a place in mainstream pensions provision, or whether the corporate appetite and potential complexity means pure DC remains the pension provision game in town?
5) Bauer - A DVD box set of '24' starring Kiefer Sutherland as Jack Bauer may make a great last minute stocking filling - and so it was that the German 'Bauer' case has been an interesting last minute stocking filler for the pensions industry. While the judgement suggests that the impact of the Bauer ruling may not be as profound on UK pensions as some commentators feared it may, the industry will need to spend early 2020 considering the implications. While more protection for DB pension schemes members on insolvency of the scheme sponsor must be a good thing, the implications of strengthening what is an already strong lifeboat regime (relative to many of our global neighbours) could impact all aspects of funding, de-risking, endgame and moral hazard provisions.
6) Another record breaker? - 2019 was a record-breaking year for buy-ins and buyouts with £40bn of deals transacted. Let me be the first to predict this record will fall in 2020 with a continued high demand for endgame solutions!
7) But what of consolidators? - 2019 was notable for the absence of progress on legislation to regulate consolidators. Will 2020 bring them better news and a regulatory platform - or will they have to continue to operate within the confines of current legislation and case-by-case regulatory approval? Will 2020 be the make or break year for consolidators if legislation is not forthcoming?
8) More pensions regulation? - 2020 will likely see a pensions bill with the much trailed "fast track" and "bespoke" regulatory regime together with stronger regulator powers. But could the reforms go further still? Some predict 2020 may be a busy year for pensions regulatory and tax changes.
9) Life expectancy - 2019 saw the latest Continuous Mortality Investigation (CMI) model continue the trend of previous years with the rebasing of projected life expectancy to a lower level than previous models, resulting in lower DB pension liabilities (all else being equal). While there is still a month to go and more data to collect, the CMI update to be published in 2020 will almost certainly see an increase in liabilities from the previous model, again all else being equal. This will be the first time in a number of years we have seen an increase in liabilities caused by a CMI model update. Will this refocus minds on life expectancy hedging via longevity swaps - a market that was notably quiet in 2019?
10) IFA availability - with more and more schemes offering members independent financial advisers (IFAs) at retirement, but continued concerns being raised by the Financial Conduct Authority (FCA), 2020 will be an important year for pensions advice - both in the way IFAs advise and the way pension schemes use IFAs. Increased oversight and the use of panels of IFAs are likely to be more prevalent in 2020, as well as more clarity from the FCA on its review of the IFA market for DB transfer advice.
So… A quiet year in pensions then…
Paul Kitson is a partner at PwC
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