Member outcomes, master trust consolidation and sustainable investment strategies will continue to be a key focus for the DC sector in the year ahead according to Hymans Robertson.
The pension consultancy firm said also expected more emphasis on the use of illiquid investments within schemes and hybrid decumulation strategies, while at the same time trust-based providers will have to grapple with the challenges of the new single code of practice.
Hymans Robertson head of DC consultingnMark Jaffray says he hopes that 2023 will be a year where member outcomes are cemented as a focus for DC workplace pensions.
“With the cost of living crisis continuing to dominate, and inflation and interest rates likely to be at higher levels than we have been used to in recent years, it will be key that the pensions industry finds ways to remind members of the value of long-term pension savings,” he says.
“Ongoing trends such as consolidation into master trusts, and an emphasis on sustainable investing, will continue at pace. It will also be crucial that value, rather than costs, drive decision making given the potential that exists to materially improve outcomes. Illiquid investments also have the potential to improve these outcomes substantially, particularly for younger members.”
He adds that he is “hopeful” that more hybrid decumulation investment strategies will be developed to better match the needs of those reaching retirement now.
“With the introduction of these more complex options, however, we will need to see the evolution of education and support. There has been slow innovation in digital strategies to help inform and engage members, so I would like to see the pace of this innovation ramp up through 2023.”
He adds: “When it comes to DC scheme governance, in 2023 trust-based DC schemes will finally need to get to grips with the single code of practice as it comes into force. Key challenges will be navigating overlap with the chair statement, clarity over exemptions for master trusts and whether the substance is genuinely being covered elsewhere, and truly understanding what an ‘own risk assessment’ is all about.
“We already know there will be a further upping of the game on ‘value for members’ as TPR and FCA present a more joined up approach to the definition of value. We expect to see a widening of the enhanced value for members’ assessments to schemes above £100m. The need to benchmark all aspects of trust-based schemes against master trusts will therefore increase.”
Looking at the main issues for DB schemes, Hymans Robertson’s head of DB pensions Susan McIlvogue says that 2022 has proved to be another eventful year for the sector. She adds: “Whilst interest rate expectations have eased back, inflation is rising and against this backdrop it certainly feels like a new era for DB pension schemes. For trustees, attention should be turning to reviewing collateral waterfalls, investment strategies and funding plans. With many schemes in a position where their actual asset allocation bears limited resemblance to their strategic benchmark, testing and rebalancing (or indeed re-setting), strategy will be important.
“Whatever might have happened to a scheme‘s technical provisions funding position, it’s likely that funding on an insurance buy-out basis will have improved significantly. This means that many schemes may find that buy-out affordability is now much closer than expected.”
She adds that schemes thinking about doing a partial buy-in will need to reassess plans and available capital in light of investment strategy discussions. “Whilst schemes can’t insure liabilities overnight, irrespective of how well funded they may be, if buy-out is now within reach there’s no better time to start preparing. As well as looking to lock-in gains, trustees should also consider pushing on with buy-out ‘readiness’ actions.”
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