A new world

The legacy of the noughties is a new world where once long term pension decisions are taken over shorter and shorter horizons. Accelerated pension funding has meant that many companies have already run for cover and by 2020 there will be very few, if any, defined benefit schemes that are still open to future benefit accrual. The next decade is, sadly, one of managing the endgame for these once highly valued schemes.

In undertaking this process effectively, Trustees need to continue to improve their standards of governance to ensure that business plans recognise the horizons that they are now working to. Trustee boards must also be in a position to react quickly to changing circumstances, whether in terms of buy out or buy in opportunities, longevity swaps or investment opportunities.

Trustee knowledge and understanding of these issues will become vital and finding experienced trustees, particularly chairmen, will become harder. Keeping scheme data in tip top condition will become more important to facilitate the fast decisions needed. The clock is ticking and missed opportunities might not come around again quickly.

Understanding the employer

Maintaining an open and honest dialogue with the sponsoring employer will never have been so important. As time marches on, the sponsoring employer will become less and less interested in the legacy defined benefit arrangement as more and more of their active employees will not actually benefit.

Deficit funding, covenant assessment (which includes employer willingness) and investment policy will be regularly debated. The sponsoring employer might also want to consider options such as Enhanced Transfer Value exercises to reduce liabilities to deferred members.

2012 – an opportunity

A new pensions world will also emerge for employers.

It will be one of auto enrolment, compulsory contributions and added bureaucracy. By 2020, the National Employment Savings Trust (NEST) (nee Personal Accounts) regime will be well underway and the UK’s workforce will recognise these new schemes as an essential part of their future financial security. Smart employers will look to develop them further than the minimum required standards, offering enhanced contributions and including them as part of a flexible benefits package.

As with any defined contribution scheme, communication will be the key to the success of NEST. The noughties have left the public with a low level of confidence in pension saving. However, it has long been shown that the workforce trust their employer most when it comes to pension provision. The change to NEST is an opportunity for employers to maximise value as a staff motivation and retention tool.

And what of the public sector?

By 2020, reform of public sector pensions will undoubtedly be underway as a result of the poor state of the country’s finances and also pressure from the private sector. The MP’s and civil service will probably go first, to set the example and others sectors will topple thereafter.

Historically, private sector pensions were designed as a replica of what had applied to the Civil Service and in reforming public sector pensions, perhaps a new pensions model will emerge for the private sector to follow.

A new language

Undoubtedly, defined contribution schemes, NEST and flexible benefits will be the theme of the next decade.

The words ‘defined benefit’ will sadly be consigned to the history books.