Pensions

In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for pensions.

Key developments in 2022 

Following the "mini budget" questions were asked over Defined Benefit (DB) schemes' use of liability driven investment (LDI) strategies. The mini-budget saw increases in gilt yields which led to collateral calls on DB schemes adopting LDI strategies, the sell-off of gilts to meet collateral calls, the intervention of the Bank of England to shore up the market (and stop the "doom loop" between the sell-off of gilts and soaring gilt yields) and questions raised by parliament and regulators alike over the use of LDI.LDI strategies use derivatives to manage the risk of a shortfall between a scheme's assets and liabilities from market volatility – in very broad terms working in a way where it appears a DB scheme holds more bonds to manage the potential volatility of the DB scheme on a company's balance sheet. 

There is continued interest in the fall-out of the LDI crisis with the potential that the shortfall in DB scheme liabilities is arguably larger than it might otherwise have been had trustees not pursued the LDI strategy. 

There are three potential periods that could be looked at – (1) the use of LDI in the run-up to the mini budget and whether LDI was the right strategy for a pension scheme together with whether the strategy had the right amount of liquidity sat alongside it, (2) the period between the mini-budget and the Bank of England pulling out of buying gilts on 14 October and whether the "right" assets/calls were made during that period to meet collateral calls and preserve hedges and (3) what trustees are doing now to review their investment strategy in light of the increase in gilt yields and pressure on the LDI market. To the extent that any losses have arisen during any of these periods (and the latter period is ongoing) such losses may be "hidden" for now with the increase in gilt yields resulting in the better funding of pension schemes but as employers start to consider the DB scheme funding position questions may be asked of trustees and in turn their advisers.

What to look out for in 2023

 The impact of the LDI crisis in 2022 is likely to rumble on in to 2023, and there could be ramifications for trustees (together with actuaries and investment managers) in 2023 and beyond.  Trustees are primarily responsible for the investment strategy of a DB scheme albeit they delegate many of the day-to-day functions and rely on advisers when it comes to a strategy. We may well see the investment obligations of trustees tested in 2023 and with that the roles of their advisers.

2023 will also see the introduction of pension dashboards, with some schemes being required to connect from August 2023. The dashboard will be a digital service allowing members of all pension schemes (not just DB schemes) to be able to see their pension information in one place, including their State Pension. Trustees and scheme managers will need to match members to their pension based on the data they currently hold and ensure that they retain accurate data for members to access information about their pensions going forward. The introduction of the dashboard is likely to mean pension schemes look again at their data and potential issues such as incorrect benefit calculations may be identified as a result (and this could lead to claims on over-looked beneficiary policies in particular). There are also lots of questions as to the responsibility for the accuracy of data on the dashboard yet to be answered, but trustees should be wary of the regulatory fines of £5,000 (for individuals) to £50,000 (for corporate trustees) of failing to be ready for the dashboard. 

The DB pension profession also continues to deal with the fall-out of the various Lloyds judgments involving guaranteed minimum pensions (GMP) where we are likely to continue to see administration issues identified as part of GMP equalisation exercises.

Written by Andrew Oberholzer.

Download our full Annual Insurance Review 2023 for more insights.