Post-Brexit pension dos and don'ts
What to do or avoid when it comes to decisions about your organisation's pension scheme post-Brexit
Britain’s decision to leave the European Union has created a huge amount of uncertainty for UK companies, especially those with close links to Europe. That uncertainty extends to pension schemes. Faced with unappealing annuity rates, workers in defined contribution (DC) schemes could well delay their retirements until market conditions improve. Meanwhile, members of defined benefit schemes (DB) may have concerns about the stability of their corporate sponsor.
HR directors face a plethora of challenges, from assuaging members’ concerns to strategising with trustees on the best way to proceed. So we’ve compiled some dos and don’ts to help you wade through the uncertainty.
If you have a defined benefit (DB) scheme…
Making snap decisions about investment strategy is ill-advised in a volatile period. “Pensions are a long-term investment,” says Janet Brown, partner at law firm Sackers. “There will be uncertainty on the DB side and the most helpful thing is to reassure members that trustees are doing their job.”
Do think about how you can make your scheme more sustainable
Undoubtedly you’re working to help assess your company’s financial position in the light of Brexit. For some HR directors the scenario may be more challenging than others.
“It’s a volatile trading environment, and we may see an increase in insolvencies among businesses,” says Lee Hollingworth, partner and head of DC consulting at advisory firm Hymans Robertson.
As they come to terms with Brexit, some businesses (especially those that trade heavily with the European Union) could find it difficult to fund their DB pension schemes. Many are already facing large gaps in their funding as a result of the slow recovery following the 2007/8 financial crisis.
Companies should seek practical solutions to paying their DB pension deficit by collaborating closely with their pension scheme trustee board and its advisers, suggests Hollingworth. “It’s not just about [the scheme] asking for more cash,” he says. “The Pensions Regulator has said that where sponsors can pay more they should. But it won’t be the right solution for everyone. It has to be based on the strength of the sponsor… Contribution levels need to be adequate and stable to ensure long-term stability.”
The need for a steady, calm approach was echoed by Andrew Warwick-Thompson, the Pensions Regulator’s executive director for regulatory policy, at a recent event hosted by the Pensions and Lifetime Savings Association (PLSA). He said: “We recognise that some schemes and their sponsors are facing greater challenges. We are vigilant to these challenges, and will be monitoring the situation closely, in conjunction with government and other agencies.
“But in our view there is no evidence that suggests a systemic affordability issue for employers with DB schemes. With careful management the vast majority of employers with DB schemes should be able to meet their long-term financial obligations to scheme members.”
Do get creative to find solutions
Companies that don’t have much ready cash available could consider creative ways to guarantee the pension scheme’s debt will be paid, suggests Hugh Nolan, president of the Society of Pension Professionals. One way to do this is by using other assets the company owns. Property, such as an office building, is particularly popular. These are what the pensions industry terms “contingent assets”.
Nolan says: “HRDs could focus on property and other assets they can promise to trustees if needed – contingent assets rather than cash up front. So: ‘if we do go bust you can have the factory!’”
Using funding triggers to take pension scheme risk gradually off the table is another approach to try with the trustee board, says Nolan. Using this approach, when a scheme’s investments do well at pre-determined points, proportions are moved from growth investments (like global equities) into safer investments, locking in investment gains. Over time many consultants argue that trigger-based strategies will help schemes de-risk and insulate themselves from risky markets.
Your approach to Brexit should depend on your company’s financial position, says Jonathon Land, pensions credit advisory leader at PwC. He comments: “Following Brexit, trustees and companies need to understand how their particular employer will be affected in the future. There will be winners and losers – you need to know which group you are in and what to do about it.
“If you have a strong covenant and can support further shocks, there is the option to take a longer-term view and you may well benefit if rates revert to long-term averages. However, if your covenant is weaker, de-risking and/or using a contingent asset would appear to be a better approach.”
If you have a defined contribution (DC) scheme…
Don’t get overly concerned by periods of investment volatility
Especially for younger age groups, investment volatility isn’t necessarily negative for DC schemes.
Hollingworth says: “If you are regularly investing in the market in a volatile situation volatility is your friend. You are buying more units in your DC fund, which over the long term will prove beneficial. So it’s almost a good thing. You only make a loss if you crystallise it by switching out or taking the benefits. It’s a case of holding still and riding out what we hope is short-term volatility.”
Do consider ways to help your older members
The news isn’t as bleak as you may think for older members of DC schemes, thanks to the pension freedoms introduced in 2014.
Retirees won’t have to lock into today’s unappealing annuity terms, says Hollingworth. “What you might find is that people don’t annuitise any more at 65.”
“What we expect to be the mean position for DC investors is that they will take their income from their pension fund on a flexible drawdown basis, complementing what work they may still be doing in a transition to retirement,” he explains. “They may not annuitise at all, or may only do so at 75 or 85, depending on what their position is.”
In addition, experienced members of staff may reconsider their retirement options, to a company’s advantage, says Nolan. The pensions freedoms will help here too.
“You can offer them part-time or consultancy work to keep their expertise in the business. They can supplement income from their salary with a bit from their pension pot, without dipping into it too much.”
Do communicate with your members
Different age groups will need different messages, says Sackers’ Brown. She suggests checking in with those near to retirement to see if their plans are likely to change, and reminding younger members that they have plenty of time to recoup any short-term investment losses.
For organisations with both DB and DC schemes…
Do choose your words carefully
Don’t be afraid to admit that you’re not sure what may happen. It’s best not to over-promise and create false optimism, urges Nolan. “Tread carefully, and never try to second guess the markets. Don’t tell people markets will go up, because they may not. It might turn out ok, but relying on a particular outcome isn’t a great thing.”
Brexit has created a huge amount of uncertainty, and nobody has all the answers. “There’s layers of uncertainty at the moment," says Brown. For now, all HRDs can do is wait and see.