With more and more defined benefit (DB) schemes becoming ‘legacy’ arrangements, de-risking within the DB pensions market continues to be an attractive prospect for employers seeking to manage their long-term financial liabilities while also protecting member benefits. From the scheme/employer point of view, de-risking exercises such as buy-ins, buyouts and pension increase exchanges (PIEs) can offer greater security and predictability in a volatile environment. For the members at the other end of the exercise though, every step towards de-risking can feel like the start of a slippery slope.

Experienced administrators who are also effective communicators can help mitigate these worries and a big part of the success of any member-related de-risking exercise should be measured through how well the scheme and team support members. Sponsors want to see significant savings from de-risking initiatives and the best way this can be maximised is by meaningful member engagement.

Primary member concerns

The most common concerns from members will be how de-risking impacts the pounds in their pockets. At a basic level, many members may not necessarily understand the options being presented to them, and may commit to choices or financial decisions they later regret. Your administration team talks to your membership every day so, when it comes to member communications, it is essential that trustees listen to the administrator and work with them to design the communication strategy.

Know your systems, know your processes

A de-risking exercise will inevitably create a bulk of incoming work which will have a knock on effect to service-level agreement (SLA) performance. Both members and trustees will be keen to see work processed as quickly as possible. Employers should ensure administration teams are adequately resourced and primed to provide comprehensive guidance and reassurance from the beginning. If necessary adequate training, call scripts or FAQ documents, should be made available to administrators well in advance of the project start date. In a complex and jargon-heavy industry, knowledgeable and confident administration teams are vital for boosting member confidence.

If necessary, teams may need to show flexibility and, potentially, prioritise certain groups of people who require extra care or attention for various reasons. De-risking should involve high quality administration that offers an informed service, with providers choosing staff who will offer real support to adapt to the needs of the membership.

Customer care

By extension, informed members go on to make informed decisions. Any change to someone’s pension benefits can alter their retirement plans, which can naturally present challenges. One of the common drawbacks in one-off exercises like these is an over-reliance on temporary or inexperienced staff who have no ongoing relationship with the members. This is where call centre cultures can fail. Ultimately, when it comes to service and engagement, we all expect to be treated well; but as de-risking can be an emotive subject for some, employers and trustees should consider providers who choose high standards and member service as their core values.

Ross Oakey
Senior Pension Administrator – Barnett Waddingham

The Government’s decision to change the indexation of pensions in payment from the Retail Price Index (RPI) to the Consumer Price Index (CPI) has been controversial and has proved difficult to implement. It has caused legal difficulties for many pension schemes, and sponsors and trustees have also struggled to ensure that asset portfolios are structured in a way that permits appropriate funding. A further complication has arisen from the more recent adoption of the Consumer Price Index including owner occupiers’ housing costs (CPIH) as the appropriate index to be used. We asked three experts to identify the various issues that trustees need to address and suggest ways in which they might be suitably resolved.


RPI has long been discredited as a measure of inflation. It was replaced by CPI in 2011 as the basis for statutory pension increases and revaluation. This led to something of a rules lottery for pension schemes. For some schemes, CPI flowed through automatically, while others ‘hardwire’ RPI. Many more have rules that are open to interpretation, which led to a long line of cases in which trustees and employers have asked for the Court’s help in working out whether their rules allow them to make the switch.

Further change is now in the air. The Chair of the UK Statistics Authority (UKSA) wrote to the Chancellor in March 2019 making two recommendations:

(i) That the publication of RPI should cease; and

(ii) In the meantime, the shortcomings of RPI be addressed by adopting the methods of the CPIH measure. In other words, RPI would become CPIH by another name.

The Statistics and Registration Service Act 2007 provides that before any change can be made to RPI, the UKSA must consult the Bank Of England as to whether the change is a fundamental change which would be ‘materially detrimental’ to the interests of holders of index-linked gilts. If the Bank of England says yes, then the change requires the consent of the Chancellor. The Bank of England did say yes, so the Chancellor’s consent is required to any change before 2030.

The Chancellor has replied to say he will not, at this stage, agree to option one. But he proposes to consult in January 2020 on aligning the calculation of RPI with that of CPIH at some point between 2025 and 2030. However, following the General Election, it remains to be seen whether this has affected the proposed consultation.

It was a missed opportunity for the Government not to legislate to allow all schemes to move to CPI if they wished. Perhaps in the future we will get a more level playing field for schemes mandating RPI in their rules, but it’s not going to happen quickly.

Tamara Calvert
Partner – DLA Piper


The funding implications of any changes to RPI from 2030 could vary significantly from scheme to scheme and will undoubtedly add an extra twist to actuarial valuation discussions.

The ‘technical provisions’ measure used to determine a scheme’s deficit under the current funding legislation depends on both the level of pension payments that the scheme is expected to make and the expected return on its assets. Changes to RPI could affect each of those components, depending on the scheme’s benefit structure, the investment strategy and how the valuation assumptions are set.

Schemes will have seen a dip in the value of any RPI-linked assets (such as index-linked gilts or inflation swaps) around the time of the Chancellor’s 4 September statement, with a further decline over the following couple of months. Any assessment of how much of this fall is due to revised expectations of future price inflation rather than other factors is inevitably subjective, but the view from analysts generally seems to be that a complete alignment of RPI with CPIH from 2030 onwards (or earlier) is not yet priced into markets. That might reflect either the uncertainty over whether a change will happen or the possibility of compensation for investors, in which case there could be further changes in asset values to come as investor views develop.

If a scheme’s pension increases are based entirely on CPI, the projected future payments are unlikely to be affected by any changes to RPI. However, if the scheme has any inflation hedging using RPI-linked assets, the value of these assets will already have fallen; if you believe that RPI will be aligned with CPIH from 2030 onwards, that could act as a further drag on the return on the scheme’s RPI-linked assets, placing further pressure on the funding position.

At the other extreme, if the scheme increases are linked to RPI, the expectation might now be that future pension payments will be lower, reducing the liability value; if the scheme is partially inflation-hedged the effect on the funding position might then be slightly positive. If there is any compensation for investors, the funding position could improve further.

Trustees and sponsors will need to think very carefully about how changes could affect their scheme under different scenarios, ensuring that they take a consistent view of how the scheme’s liabilities and assets (and possibly the sponsor’s financial position) would be affected in each scenario.

Graham McLean
Head of scheme funding – Willis Towers Watson


From a portfolio perspective, pension schemes have tended to hedge the majority of inflation-linked liabilities with RPI Swaps and Index-Linked Gilts. For example, a 20-year RPI-linked assets faces a material re-pricing downwards of up to 5% if the Chancellor’s proposals are implemented (November 2019 market conditions).

Aligning RPI with CPI-H would have two key implications on pension schemes funding levels:

1. A loss from any CPI-linked liabilities that have been proxy hedged with RPI-linked assets (as hedging assets would fall whilst liabilities remain unchanged)

In practice, most pension schemes’ CPI linkage tends to be highest during the next 10 years (deferred revaluation). As a result, proxy hedging these increases with RPI linked assets is less exposed to RPI reform given that reform is only expected to impact RPI after 2030. Whilst the impact will be very scheme-specific, a typical scheme with high inflation hedging levels could face a circa 0.5-1% funding drop. Indexation Complication / Bringing Pensions together / Another record year in bulk annuities and more to come in 2020 By Paras Shah, Head of LDI, Cardano

2. A gain from any RPI-linked liabilities that have not been fully hedged (as liabilities would fall)

So, what can be done to protect from changes?

Pension schemes could switch to using CPI-linked assets to hedge CPI linked liabilities. However, in practice the CPI linked asset market is fairly illiquid and has limited supply at longer dated tenors.

Alternatively, schemes could reduce hedging of longer dated CPI-linked liabilities which are being proxy hedged with RPI-linked assets. However, in practice this means schemes would be exposed to outright movements in inflation levels.

Trustees should also note that considerable uncertainty remains on the outcome of any reform:
• Proposals could be further amended under a new government
• RPI may be reclassified as CPIH + X p.a. where the spread is representative of the difference between the two measures; in this case funding levels would not be materially impacted
• RPI asset holders (e.g. Index Linked Gilt holders) could be compensated by the issuer of the asset. In such a scenario, schemes could expect a windfall funding level gain.

In summary, pension schemes should ensure they conduct appropriate scenario analysis to understand the implications of reform, noting that considerable uncertainty remains on any changes.

Paras Shah
Head of LDI – Cardano

It is clear that changing the index for pensions increases has proved complicated. Whilst the pensions industry continues to struggle with its implementation, it is clear that reaching final resolution is still several years away.

By the time you are reading this, a new Government (in one shape or form) will be in power. Whilst there would be a number of issues on the pensions industry’s reform wish-list, changes to the tax system must be close to the top.

2006’s pensions tax ‘simplification’ has been followed by layer upon layer of complexity, and there seems to be a growing consensus around making the system cleaner and clearer to understand.

Under the current system, tax relief is designed to incentivise saving – up to a point. Allowances in place mean that, while higher earners receive relief to match their personal tax rates, this is not without its limits. And the allowances that cap relief have fallen dramatically: the standard lifetime allowance (or LTA) which at its peak reached £1.8 million fell to £1m in 2016, although it is now creeping slowly upwards again each year by reference to the Consumer Price Index (CPI). Existing rights have been grandfathered along the way with a raft of transitional protections, but these have hardly helped simplify matters. Similarly, the standard annual allowance (AA) once stood at £255,000, but is now just £40,000.

More recently, the tapered annual allowance (introduced from 6 April 2016), started to restrict pensions tax relief for individuals with ‘adjusted income’ (ie taxable earnings including pension savings, but excluding charitable contributions), above £150,000. Under the taper, for every £2 of adjusted income over £150,000 an individual earns, their AA reduces by £1, subject to a maximum reduction of £30,000 (so someone with an adjusted income of £210,000 or more has an AA of just £10,000).

The impact of the tapered AA is now beginning to bite for an increasing proportion of the workforce, with some unforeseen consequences. Over the last year, NHS pensions have hit the headlines, with concerns about the effect of the taper leading to a series of consultations proposing increased flexibility for doctors. At the same time, Her Majesty’s Treasury (HMT) also noted that the tapered AA was indeed under review.

Of course, with the calling of the General Election, we will have to hold our breath a little longer on any potential reforms. However, at the time of writing, in a surprise move, the Government had just pledged to pay the tax bills of NHS workers in order to stave off a winter health crisis – perhaps tacit acknowledgment that change is needed?

Pensions tax is clearly an area ripe for some degree of reconsideration in the new year…

Katharine Swire
Senior Associate – Sackers

As trustees and employers think about the future of their DB schemes, the range of ‘end-game’ options available to them is increasing. Consolidators, also known as ‘Superfunds’ are a new choice. ClaraPensions is one of those new consolidators, bringing schemes together and providing fully funded covenants. While consolidation is possible today, there has been much interest in the future regulatory regime for these pension schemes.

The Need for Consolidation

We believe there is clear need for consolidation. This is evident from the schemes that are showing an interest in consolidation. Their trustees and employers are looking to give their members the best chance of receiving their promised benefits in full. They are not able to afford buy-out but have a clear desire to put their pension schemes in a more secure position.

Consolidation models offer the opportunity of achieving an endgame with greater security. The consolidator takes responsibility for members from the existing scheme, replacing the traditional employer covenant with a fully-funded capital buffer. There are different models of consolidation; either the consolidator ‘running-off’ the liabilities of the scheme, or a ‘bridge-to-buyout’ model where the consolidator will pass the schemes to an insurer over time. A run-off consolidator will look to ensure it holds sufficient funds in its buffer with part of the buffer being released as profits when funding hits trigger levels. Alternatively, consolidators like Clara have a buyout destination, which means that the buffer can be structured so that neither capital nor a return on capital is released until member benefits have been fully secured. This approach means the interests of members and capital are aligned in seeking the most efficient bridge to buyout.

Broadly, we have seen three drivers for schemes considering consolidation. The first, and most notable, are trustees who are concerned that the weakness of the current employer covenant poses too high a risk to members.

These trustees recognise that a consolidator’s permanent and funded capital can provide a more secure covenant for members. The second driver is corporate activity and restructuring where the trustees and employer have a one-off opportunity to put pension scheme members in a better position. Defined Benefit (DB) pensions are a valuable benefit for members that should be protected, but they are an undoubted barrier to investment in UK employers. The third driver is the employers themselves, who want to invest in their businesses but recognise the need to first fulfil their pension obligations.

While the buy-in and buy-out market continues to show welcome growth, only around 2% of total outstanding member liabilities are being secured with insurers each year. A proportion currently falls to the safety net of the Pension Protection Fund (PPF). Remaining schemes continue to be reliant on their sponsor. The Pension and Lifetime Savings Association (PLSA) DB Task Force estimated that large numbers of members with the weakest sponsors faced only a 50:50 chance of receiving their promised pensions.

Given the scale of UK pension liabilities, more than one safe solution is needed.

The Right Regulatory Regime

Not only is consolidation needed, it is possible today under current pensions law.

Clara and other consolidators are preparing transactions. It can be safely delivered under the existing regime with close oversight from the Pensions Regulator. We are engaging closely with the Regulator and the Pension Protection Fund. They have provided both robust and helpful challenge as consolidation has developed. We are currently working intensely to satisfy the Regulator’s pre-authorisation approval requirements; quite rightly we’d expect to receive this approval before announcing our forthcoming first transactions.

While consolidation is both needed and achievable now, we’ve always supported the development of a bespoke authorisation regime – we’d like to see specific provisions include in any future pension legislation. Some have argued for a regime much stronger than that applied to other pension schemes. We think that to become a viable solution for members it is necessary for the consolidation regime to strike a balance between member security, the cost to employers and returns to the providers of capital. If the bar is set too high, consolidation will not be a viable option for trustees and employers. This will mean real loss for real members.

The Industry Perspective

We’ve been struck by the interest in consolidation from across the pensions industry. There is widespread recognition that consolidation is good policy and is needed today.

PMI’s own analysis in April showed that 67% of those surveyed thought DB consolidation a good idea. PLSA’s most recent survey from October showed 89% of pension professionals surveyed would consider consolidation as the appropriate endgame for single employer DB schemes.

Consolidation is rightly generating a wider debate across the industry about the different models available, the right approach for trustees and employers in choosing a consolidator, and how the benefits of merging administration, investment and other services are best achieved.

The PMI and PMI members have been playing an active part in this debate, helping shape consolidation so it can work for members, employers and new providers.

We’re playing our role in those debates too. Clara has a growing team and access to the experience of both our independent trustees and nonexecutive directors. Subject to approval from the Pensions Regulator, I’m hopeful that we’ll soon see consolidation making pensions safer.

Adam Saron
Chief Executive – Clara-Pensions

As we enter the new year, we leave a frustrating period for pensions policy initiatives and look with some optimism to a new Parliament in the hope that many key ideas can finally be brought to fruition. For over three years Brexit has cast its shadow on any attempts to introduce new ideas to the nation’s pensions system. Last year’s short-lived Pensions Bill was a belated attempt to introduce long awaited reforms. It seems reasonable to assume that a very similar Bill will emerge during the course of the new Parliament as it contained little that was politically contentious. However, at this time it is worth pausing to consider the full range of challenges currently facing the pensions industry and the policy choices the new Government could make to address them.

A growing issue to be addressed is effective workplace pension provision in the expanding gig economy. Automatic Enrolment has proved to be one of the great pensions policy triumphs of the modern era, with over ten million workers now accruing pension savings via a workplace pension scheme. However, it is most effective within a traditional context of individuals having a single full-time job. Over the past decade, it has become increasingly common for workers to have two or more part-time jobs or to be self-employed. Both categories of worker are outside the scope of auto-enrolment, and if the system is to be as comprehensive as originally envisaged, significant changes will be necessary.

The Trades Union Congress (TUC) has long campaigned for all jobholders to be automatically enrolled into workplace schemes. Although an administratively simple solution, it risks including many workers for whom pension saving would not be suitable due to low overall earnings levels. The Taylor review considered options for simplifying pension provision for the self-employed but adequately compensating for the absence of an employer contribution is a problem which remains unresolved.

The Pensions Bill did not contain any provision for allowing Defined Benefit (DB) consolidators to commence work in the UK. This was not surprising: there is a continuing debate concerning the degree of funding that is appropriate for such schemes. Ultimately, if they are required to be as well funded as insurance companies, it would defeat the object of being an alternative to insurance companies. Clearly, this paradox will have to be resolved if the Regulator’s objective of more consolidation is to be achieved.

The pensions industry awaits the Regulator’s response to last year’s consultation exercise on trusteeship and governance. It is generally agreed that the sheer number of registered schemes in the UK – and the number of trustees charged with their governance – is excessively high. In response, the Regulator is promoting a growing drive towards professionalisation, with lay trustees required to demonstrate higher standards of performance. Whether the Regulator is serious about requiring all trustee boards to appoint a professional trustee remains to be seen. In any case, there is no doubt that schemes will be required to show higher standards or be forced into consolidation.

Another debate within the industry concerns the suitability of the sole trusteeship model. The Regulator has never made any secret of its misgivings about this approach, whilst employers and professional trustee firms argue that in many cases it represents the most practical and effective form of governance. Last year, the Association of Professional Pension Trustees (APPT) formed a subcommittee charged with developing a code of conduct for those providing sole trusteeship services. The intention is to persuade the Regulator that sole trusteeship can offer effective standards of diversity and oversight. It will be interesting to see how this project develops.

Another major policy challenge concerns the growth of Collective Defined Contribution (CDC) schemes. The series of fringe meetings held at last year’s party conferences demonstrated that there is strong consensus about the viability of CDC and that policymakers are already looking beyond the single-employer model accommodated in the last Pensions Bill. Expanding CDC into the Master Trust sector would seem a logical development. Currently, offering traditional Defined Contribution (DC) provision conforms well with the auto-enrolment ethos in the induction and accumulation phases. However, decumulation requires members to make an active decision concerning complex options. In contrast, CDC would offer an effective system of defaults at each stage of scheme membership. By default, a scheme pension would automatically become payable with a transfer value available for those preferring to exercise pension freedoms.

The new year offers a series of policy challenges for the new Government.

The changing nature of our society has brought about a real need for reform in the pensions system which has been frustrated by the Parliamentary logjam caused by the Brexit debate. It is to be hoped that the new year will finally provide scope for new ideas.

Tim Middleton
Director of Policy and External Affairs – PMI

As we head towards the end of the year, it’s a good opportunity to review how far we’ve come and to look forward to the challenges ahead.

In the area of master trusts, we’ve come a long way. This time last year, schemes were busy preparing and submitting their applications for master trust authorisation and TPR had begun to receive applications.

Now, 12 months on, we have almost finished the authorisation of existing schemes and have a market of master trusts that millions of savers can be assured meet high standards.

We don’t have a view on what the size of the market should be – our focus is to drive up standards but, as expected, there has been some scheme consolidation.

But our work to ensure master trusts are well governed doesn’t stop with authorisation. Through supervision we’ll continue to work with authorised schemes to ensure high standards are maintained and schemes continue to focus on delivering positive outcomes for members.

We’ve learned a great deal about master trusts and the market through authorisation, and we’ve started to build good one-to-one working relationships with those running schemes. We’ve learned about the different financial models that schemes operate and how the different relationships in each master trust work. This is valuable information to us as we now enter the supervision phase.

In the first year after authorisation, the intensity of supervision will be driven by the potential impact of each master trust’s failure on the market, including the number of members in the scheme and our view on the risk of failure.

We’ll be undertaking a range of activities which will involve engaging with trustees, strategists, funders and other relevant people including the scheme administrator.

These will include:
• periodic scheme evaluations
• proactive monitoring of particular concerns across the market
• requesting a supervisory return to be completed annually
• reviewing regular and ad-hoc information such as chair’s statements, scheme funder accounts, annual report and accounts, and trustees’ business plans to check that schemes continue to meet the authorisation criteria
• reviewing significant and triggering events and identifying the impact on the scheme.

We expect those responsible for master trusts to be open, honest and transparent with us – and they should contact us if they’re concerned about any emerging risks which could affect the scheme’s ability to continue to meet the authorisation criteria.

Master trusts are trail blazers and through our Future of Trusteeship work to drive up standards, we expect all DC schemes to look at master trusts as exemplars – and think about how they too can improve their governance standards and safeguards, to better protect savers.

Through master trust supervision – we are not here to catch schemes out – we want to work with them to help ensure they stay on track.


This approach aligns with our supervision of other schemes we regulate.

Through relationship supervision, we are now engaged with significantly more schemes, targeting them through new initiatives across a broad range of areas.

To date we have been working on a one-toone basis with more than 30 public service, defined benefit (DB), hybrid, and defined contribution (DC) schemes, and we will be extending this supervision to beyond 100 schemes this financial year.

Relationship supervision is not only focused on schemes of strategic importance. It also involves more direct contact with large numbers of schemes, using data we hold to target them in relation to particular elements of governance and administration. We will give clear direction about the standards that schemes are expected to meet, and what the consequences of failing to meet those standards could be.

Record keeping

An example of this approach is that we’re now asking the trustee boards of 400 schemes to examine the data they hold to ensure it is accurate and up to date. We’ve set a six-month deadline by which trustees will be required to report back to us.

Schemes targeted in this crackdown are all types and sizes which we believe have neglected to review their data in the last three years. We’ll also be writing to 1,200 schemes prompting them to carry out data reviews every three years.

Good data is key to good scheme governance – and it is also essential to the Government’s dashboard plans; the dashboard will only be as good as the data it holds.

Whether it is poor record-keeping or other practices which put the scheme at risk, where necessary, we will use our powers to prosecute people when they put savers at risk.

But we’re not an enforcement-led regulator – we would much rather those we regulate work within the law, within our guidelines and with us.

Kim Brown
Head of Master Trusts – The Pensions Regulator


The legal process under Part VII of the Financial Services and Markets Act 2000, which allows the transfer of insurance policies from one insurer to another, is a longstanding requirement necessitating court approval. There have been many applications over the years which have been blessed by the court. However, Prudential’s recent proposed transfer which related to an £11.2bn sale of annuities from Prudential to Rothesay, covering 366,000 policyholders, was not so lucky. The judge declined to approve the transfer despite the independent expert appointed by the court being satisfied that the transfer would have no material adverse effect on the security of policyholders’ benefits, and the FCA and PRA being happy for it to proceed.


Around 1,000 policyholder responses to the plans (15% of total responses and 0.4% of the 258,000 policyholders communicated with), could be characterised as objections. The judge accepted that the opposing policyholders had chosen Prudential because of its age and established reputation, that Rothesay lacked those attributes, and that the court should give some weight to their exercise of contractual choice.

Although Prudential had made no contractual promise to policyholders that it would not transfer their policies to another provider, the judge said that there was considerable force in the policyholders’ submissions that they reasonably assumed this would not happen. The judge also thought that it was reasonable for policyholders reading statements that they were buying “a lifetime annuity with Prudential” to make the assumption that – unless they agreed otherwise – it would be Prudential that would provide them with the resulting annuity for life.

Finally, the court found that it was not a fanciful possibility that either provider might require external financial support over the annuitants’ lifetime.

In such an event, there was a material difference in the potential availability of assistance for the two companies in question.

What are the implications?

Perhaps the key message to take from the decision is that the court will jealously guard its discretionary role in the Part VII procedure. Although the judge accepted that the court’s focus in many Part VII cases was on the security of policyholders’ benefits, he laid emphasis on the court being obliged to consider “all the circumstances of the case”. There is no presumption in favour of transfer and if the agreement of the independent expert and relevant regulators were enough, then there would have been no need for the legislation to give the court a role at all.

The judge did not make any broader assertions about the selection of insurers in other scenarios; however, this judgment will clearly cause concern more widely that policyholder activism might become a new feature of Part VII transfer proposals.

Perhaps unsurprisingly, Rothesay has filed an appeal against the decision, although it’s unlikely to be heard for several months.

It will be interesting to see how the Court of Appeal deals with the case and whether it treats the judgment as laying down principles of wider application.

In the meantime, insurers are likely to proceed with caution, and in some cases perhaps not proceed at all, until more clarity is available.

Pete Coyne – Partner, and
Amanda Chamming’s – Senior Associate, CMS
Cameron McKenna Nabarro Olswang LLP

Most UK workers have become significantly more uncertain about the whole notion of retirement over the past two decades or so. The shift from Defined Benefit to Defined Contribution pension schemes means that they’re now having to contend with uncertainty about how they can best plan for retirement, how their pensions investment funds will perform, and the age at which they can retire.

The result of this uncertainty is lots of anxiety about pensions and retirement. Many people feel helpless and not in control of their own future, and a lack of understanding about the current pension system compounds these negative emotions. People simply don’t have the knowledge and confidence to make informed decisions about their finances, including their pensions.

Encouragingly, our Future Face of Retirement research shows that employers are serious about supporting and empowering their people to approach pensions and retirement planning positively. Many recognise that it’s in nobody’s interests to have large sections of the workforce feeling anxious and out of control about their prospects for later life, and they’re offering workers the information and support they need to feel more in control and aware of their options.

It’s critical that both employers and the pensions industry itself reflect on how they can engage and educate people to help them to enjoy better retirement outcomes. Even now, so much communication around pensions is full of jargon and inaccessible, technical language that turns people off and reinforces their belief that pensions are simply too complex and too boring for them. A lot of people have argued that we need to ‘re-brand’ pensions to overcome this negative belief and it certainly has its merits. Getting people to think about lifetime or long-term savings could be an easier task than trying, yet again, to engage them around pensions.

Whatever label we give it, employers need to take a far more realistic, pragmatic approach to communicating about pensions, recognising that many people find themselves with inadequate savings and little room for manoeuvre.

Communications need to be simplified to give people the information they need in a way that is easy to understand and act on.

Technology has a crucial role to play in driving meaningful engagement and education, and organisations are increasingly embracing innovations in Augmented Reality and Artificial Intelligence to deliver more personalised communications, and to allow members to explore and visualise the impact of the choices they make today on their future.

Communications also need to become more relevant and more timely – we’re seeing far more sophisticated use of nudge communications, encouraging people to consider pensions at significant events such as getting a pay rise or bonus, getting married or having a child.

A more uniform or standardised way of communicating about pensions would also be beneficial – currently, approaches vary hugely between schemes and this increases confusion and complexity for people with multiple pensions. The government’s Pensions Dashboard initiative is to be welcomed and, as an industry, we need to ensure that it meets its objective of providing people with a far clearer view of their overall pension position. Our research shows that there is a real appetite for more peer-to-peer engagement and education, and the pensions industry must start listening to employees and delivering the programmes that they’re demanding.

Fraser Stewart
Business Development Manager – Capita Employee Solutions


HMRC has been working with pension scheme administrators across the UK to reconcile scheme and HMRC records regarding contracted-out pension liabilities (GMPs). HMRC has returned all the outstanding queries issued to them and closed the reconciliation window to further queries but it is HMRC’s intention to issue one final Scheme Reconciliation Service (SRS) data report to every pension scheme before the end of this year.

The SRS data report will present the final membership and GMP position for every Scheme Contracted-Out Number (SCON) and concludes 5 years of reconciliation work between HMRC and the pensions industry. However, this is not the end of the process for pension schemes.

New Final Data Cut from HMRC

In order to ensure that HMRC has correctly acted upon all the instructions submitted by administrators and to identify whether any additional liabilities have been added to pension schemes by other schemes and providers as part of their reconciliation projects, the SRS report will require a detailed analysis. This means checking it against the final results held by each pension scheme administrator for each GMP Reconciliation exercise carried out. This analysis is a new piece of work above and beyond that already planned and carried out, and may not have been factored into GP projects to date; it was never HMRC’s intention to provide a final data report to pensions’ administrators.

Provision of the SRS report was only agreed with HMRC a few months ago following pressure from the pensions industry via the HMRC Forum. The pensions industry lobbied for this final report for a number of important reasons, including:

• scheme administrators need to have visibility of any additional liabilities that may have been transferred to their schemes by other firms during the course of their GMP reconciliation exercises; and

• HMRC records may not have been updated with information supplied by the pensions industry or it may not be correct even if confirmation has been received from HMRC. Therefore, a review of the final data report from HMRC is the only way to confirm reliably that the information held by HMRC agrees with the records for each pension scheme.

SRS data analysis

We recommend that for all the pension schemes for which a GMP reconciliation project has been undertaken, the Trustee should:
> complete an analysis of the reconciled GMP data against the final SRS data report
> check that the membership and GMP liability values agree with those on the HMRC database, and
> prepare a final GMP reconciliation summary of all findings and proposed solutions for any new membership, and GMP value discrepancies identified.

It will be necessary to complete this work in tandem with the Phase 4 GMP reconciliation work so that all necessary data are available for GMP equalisation. In addition, if the scheme at some future date moved to buy-out or winds-up, this summary will provide a robust audit trail and evidence what has been done.

Lorraine Harper
PMI Vice President and Director of JLT Employee Benefits

So, you’re thinking of doing a longevity swap. Your advisers are probably excited to get underway, and as a trustee board you might be a little nervous about becoming involved in such a large transaction. You may be thinking about how this fits into a longer-term strategy in your scheme’s journey plan – and if not, you should be.

One of the issues you ought to be considering (and indeed may discuss with the scheme’s sponsor prior to going to market) is whether your scheme needs a right to convert your longevity hedge into a bulk annuity in the future. Once upon a time, this might not have been on your radar, or in the contemplation of your counterparty, and some in the market had suggested in the past that novation of a swap just couldn’t work. But recently we’ve seen a couple of developments in this space, particularly transactions in which BA and Rolls-Royce have converted their longevity swaps into bulk annuities.

So, are longevity transactions just another stepping stone on the way to full buy-out?

Stepping stone, or the bridge to self-sufficiency?

Your longevity swap may just be another milestone on the journey towards full buy-out. It is perfectly reasonable for some schemes to look to the market to hedge longevity risk now whilst accumulating further investment growth in order to buy out the scheme at a later date. If this is the case, then you should think about whether your future bulk annuity opportunities would cover the entirety of the population under the longevity hedge, or whether you will need to tranche that population to seek smaller bulk annuity transactions (and split up the longevity swap in the process). This will impact your approach to setting the framework for this to happen with your counterparty. It may instead be that you and your sponsor think that the scheme has an opportunity to walk like an insurer, talk like an insurer, but remain a pension scheme meeting members’ benefit payments well into the future. If this is the case, a longevity hedge is likely a long-term solution for your scheme (albeit that buy-in transactions may be regarded as a good investment opportunity down the line). A more flexible approach to setting the future conditions for conversion to a buy-in could be taken here with your counterparty.

Why conversion might become the norm

It seems reasonable to assume that we will see more conversions to annuity going forward, and we should therefore see more insurers and reinsurers in the market looking to accommodate such conversions. The longevity swap market had its ten-year anniversary this year, and solutions for smaller schemes are starting to sprout. Solvency II rules, noting that they have now been in force for three years, also have an impact on the way insurers and reinsurers deal with their longevity risk and this potentially opens up more opportunities for schemes to convert their longevity transactions to bulk annuities.

All of this means that, going forward, schemes should think clearly about their goals; in turn this will have an impact on how they approach the market and the contractual terms to get there.

A note on structure

It’s worth noting that there are several possibilities for transacting a longevity swap: schemes can use the existing infrastructure available through a commercial insurer, or they can use a captive insurance structure, choosing either a commercial provider or putting together a completely bespoke structure (perhaps leveraging off their sponsor’s existing business). Generally speaking, using a bespoke route yields more flexibility on the contractual terms as the trustees can negotiate directly with the reinsurer.

Hard-boiled or soft poached?

There are two main contractual areas to consider once you’ve decided whether conversion to a bulk annuity is the scheme’s ultimate goal: restructuring and early termination provisions. Which is more important will depend on whether or not your scheme is consciously looking for a buy-out opportunity later on.

If buy-out is your goal, then consider how you will convert tranches of your longevity swap. Partial restructuring should be discussed with the reinsurer and you may wish to nail down some process around how the reinsurer will react to the scheme’s proposal to convert part of the swap to a buy-out. It would be worth planning your exit strategy now. What kind of early termination provisions do you have in place to give some certainty that you can buy out parts of the longevity swap population without disturbing the remainder? Linking these partial termination provisions with the restructuring clause can provide the trustees with greater flexibility: if your reinsurer says no to your proposal to partially novate the swap to a bulk annuity provider, having that link would allow you to use the nuclear option and terminate that portion of the swap.

If, alternatively, you’re looking to hold your longevity swap for the long-term, a more flexible approach may be more appropriate for you. An agreement to cooperate and engage with a proposal to restructure in good faith will go some way to pinning down an organisation for the future should the people involved in today’s negotiation move on. Setting out a number of conditions for converting the swap could also add certainty and help you understand your counterparty’s process for dealing with future proposals to convert the transaction.

Some reinsurers will be more flexible than others in terms of what contractual commitments they will make for future generations of the business. Trustees should remember that negotiating their rights around restructuring and early termination is both about getting clarity in the contract on how your counterparty will deal with particular circumstances, and putting your intentions and aspirations on the table with that organisation to ensure they’re aware of and willing to support them.

There’s lots to think about here, and strategising beforehand and looking for some engagement on the issue in your request for a quotation can be useful.

Trustees and scheme sponsors should discuss with their advisers what it is they’re after: how the swap fits into the journey plan for the scheme, and what the key concerns and requirements are for stakeholders in completing that journey.

Mike Fallow