With the dust settling on the most recent swathe of pension legislation, Julian Mainwood looks at just some of the current trends in the defined benefit and defined contribution market

Market trends
The best information available about the size of the market is that shown in the ‘Purple Book’ published by The Pensions Regulator and the PPF. The 2011 edition continues to show a contracting DB market in the UK with virtually no new schemes being set up, and most of the existing schemes closing their doors to new entrants.

The natural delay in publication has to be factored in, but the figures show that at 31 March 2011 the number of schemes open to new members had fallen to 16% (2010: 18%). The number of schemes closed to members but open to accrual remained static at 58% and schemes closed to both accrual and members increased to 24% (2010: 21%). Although there appears to have been a slight slowing down in contraction the trend continues downward and many more DB schemes will close to members and accrual over the next few years, with an increasing number of companies relying on contract-based DC pension arrangements for future provision.

Even where DB schemes have closed to future accrual, prohibitive buyout costs can be a barrier to full wind up. Economic market conditions may improve funding positions over time but, in the meantime, the buyout market has been busy developing new products and approaches to meet the de-risking challenge.

De-risking initiatives
Where full buyout is not a viable option many schemes are looking at other de-risking initiatives such as longevity swaps, buy-in policies, enhanced transfer value exercises (ETVs) and pension increase exchange exercises (PIEs). The latter two have recently become subject to an industry code of good practice prompted by the Pensions Minister’s concerns about poor practices in pension incentive exercises. The code is intended to improve the standard of such exercises whilst acknowledging that they remain a legitimate tool for sponsors looking to manage defined benefit scheme liabilities. Further information on dealing with incentivised exercises can be found at www.incentiveexercises.org.uk.

Good governance
Governance is a crucial part of pension scheme management,
which has resulted in a number of administrators adopting the AAF 01/06 internal controls accreditation. This has become an important part of a scheme’s risk control framework.

The regulator’s record keeping guidance to help schemes measure and test data set ambitious targets for data quality by the end of 2012, with ‘common data’ expected to be 100% present if created after June 2010 and a challenging 95% target set for ‘legacy’ data created before that date. In this context ‘common data’ covers 11 main data items which identify a member uniquely such as date of birth, National Insurance number and address. Pension administrators should ensure trustees are aware of this requirement and agree an action plan with them to check that the data held is present and accurate. Subsequent higher profile regulatory initiatives may have knocked record keeping off the front page, but we should expect to see it back in the headlines in the latter half of 2012.

Auto-enrolment
The 2008 Pensions Act set out new duties on employers to automatically enrol certain workers into a qualifying workplace pension scheme and pay a minimum level of contribution. For employers who do not have a qualifying workplace pension scheme or do not want to set one up, the government has set up the National Savings Employment Trust (Nest) as an appropriate vehicle.

With auto-enrolment there will be a greater awareness of long term saving, be it through an employer’s scheme, Nest or other industry alternative. Increasingly there could also be more interest corporate ISAs which could be a more attractive and familiar investment vehicle, especially for the younger population.

Written by Julian Mainwood, partner at Barnett Waddingham

Share Story: