Pensions consultant Mercer believes that 2012 will be a tumultuous year for the pensions industry with increased focus on governance, flexibility and tactical decision-making. Partner Christian Hardy believes that given the impending task of deleveraging Western economies, resolving the Eurozone crisis and coping with a weak economic outlook trustees and sponsors will need to stay alert as conditions could change quickly.
Hardy said: To date many scheme have not begun de-risking programmes because they perceive hedging as too expensive. Yet opportunities have come up, but have necessitated prompt action. Trustees who have put in place asset or liability management structures will have fared better in the downturn than those who have not.
Hardy said that while it remains important for the pensions industry to maintain focus on a long-term funding objective, success in volatile conditions will require speed and flexibility when changing investment strategy or taking advantage of opportunities to reduce risk. Those trustee boards with sufficient time and resources should consider establishing rapid response sub-committees which can convene and respond swiftly to events. Those with more limited governance budgets could consider whether some of these decisions should be delegated, he added.
Outlining the key pension issues in the UK for 2012, Mercer also notes the challenge for regulators in 2012 will be to get the balance right from the proposed adoption of Solvency II for pensions regulations to allowing practical measures for SPVs to support a solid pensions system while helping companies manage their costs. The government seems interested in exploring risk-sharing structures which is certainly welcome. Whether it is all too late remains to be seen – well continue to watch this space, said Deborah Cooper, Head of Mercers regulatory team.
Mercer added that other hot topics for 2012 include market volatility, risk management and pensions reform. Mercer believes trustees should consider scenario planning to understand how their funding position and the sponsors covenant would respond in distinct economic situations. It may also be helpful to understand how specific macro events such as a break up of the Euro might impact the scheme assets and liabilities as well as the covenant, Mercer added.
Staying with market volatility and risk management, while having long-term funding and investment targets are good starts, said Mercer, not thinking about the best governance structure to enable nimble decision making and effective implementation of changes will lead to wasted opportunities.
Whilst some markets look decidedly unattractive there may be selective opportunities to increase the level of hedging e.g. inflation and or longevity, said Mercer. As above trustees and sponsors need to be nimble to ensure they can take advantage of such opportunities before they disappear.
The UK pensions regulator continues to press the case for schemes to improve the quality of their data. This can have a very immediate and direct impact on the pricing of certain contracts, said Hardy. Longevity swap providers or annuity providers will charge a premium for inaccurate or incomplete data quite possibly many more times the cost of a data cleanse – so it really makes financial sense to get onto this sooner rather than later.
Mercer noted that 2011 has seen a marked increase in the number of liability management exercises designed to transfer benefits to members such as Enhanced Transfer Value exercises, whereby employers offer employees the opportunity to transfer their benefits to another scheme, usually incentivizing them to do so. The company said it expects companies to continue to look to these approaches as a way of managing down the risk within their defined benefit schemes.
(JDC)