Viewpoint 2 2023

VIEWPOINT

PLSA CONFERENCES: SETTING THE DIRECTION OF TRAVEL

CAN PENSION FUNDS SUPPORT UK PLC?

BUILDING THE FUTURE OF THE LOCAL GOVERNMENT PENSION SCHEME

HSBC’S DEFINED CONTRIBUTION SCHEME

Bringing the industry together

Julian Mund previews some major events and initiatives in our centenary year.

will set the scene with her welcome address – outlining a year of change and turbulence, but also one of hope and opportunity.

ON THE SAME PAGE

Welcome to the summer issue of Viewpoint magazine for 2023. We’re already halfway through the PLSA’s centenary year, and what a busy year it’s shaping up to be. This issue coincides with two of our major events – the PLSA’s Investment and Local Authority conferences. A huge amount of work goes into making these events the prime knowledge and networking destinations for members, and really captures our role in 2023 as ‘the voice of workplace pensions and savings’.

HISTORY OF EVENTS

The PLSA has a long history of bringing the pensions industry together at regular conferences, with the first ever address to members given by Henry Lesser, OBE, a barrister and member of council for South Metropolitan Gas Company’s Pension and Insurance Funds and tagged onto the Association’s AGM in 1934. Among his comments, Lesser noted that in general the law did not then require a fund to publish accounts, submit reports to any supervising authority, or even have any actuarial valuation.

I imagine the speakers’ comments will be rather different at the PLSA’s forthcoming Investment Conference, now in its 46th year and returning to the beautiful city of Edinburgh. At the conference you’ll hear differing political standpoints from Andrew Griffith MP and former Shadow Chancellor Ed Balls. Professor Danny Blanchflower will explore the macroeconomic landscape, and the PLSA’s Chair Emma Douglas

The PLSA’s major conferences have become the cornerstone of networking for our members, and an opportunity to hear what your peers are thinking. Tony Broccardo, CIO at Barclays UK Retirement Fund, will join a cast of leading investment experts to share insights on how schemes have been responding to recent challenges and developments.

FOCUSING ON LOCAL AUTHORITY PENSIONS

The PLSA’s Local Authority Conference, which has been running for nearly 20 years, is a prime example of a conference built around amplifying the voices of local authority pension schemes and their advisers.

One year on from our report into the challenges and opportunities facing the LGPS, this year’s event will ask what’s changed and what still needs work to ensure the operational sustainability of the scheme.

We’re pleased to welcome speakers from across the LGPS and beyond, including David Murphy, Chief Executive of NILGOSC, on the launch of the England and Wales SAB Annual Report, and the Spectator’s Katy Balls providing her perspective on UK politics. We’ll also look at the investment outlook for schemes, communicating with employers and savers during the cost-of-living crisis, as well as what’s next on ESG, pensions dashboards, and much more.

FORUMS FOR DEBATE

It’s not just conferences that we have on offer in 2023. We also have a busy schedule of webinars – check out the events calendar – and new for this year we have launched a series of one-day face-to-face Forums geared towards networking and discussion. There’s a write-up of what you missed at the Trustee Forum in this issue of Viewpoint

Ensuring that our members’ views are heard by the people that matter is at the heart of what we do at the PLSA. It has been an exceptionally busy start to the year talking to ministers and policymakers on members’ behalf, and we are delighted that the government is backing Jonathan Gullis’ Private Member’s Bill, extending automatic enrolment to age 18 and from the first pound of earnings – as advocated in our report Five Steps to Better Pensions, and central to our mission of helping everyone achieve a better income in retirement.

The PLSA’s Five Steps to Better Pensions consultation has now closed, and you can read more about the PLSA’s next steps and progress in this issue.

You can also read about our call for government, regulators and the pensions industry to adopt the PLSA’s Guided Retirement Income Choices (GRIC), to help all savers get fuller support from their schemes and providers in decumulation.

ISSUES THAT MATTER MOST

In our response to The Pensions Regulator’s consultation on its draft DB Funding Code, we have put members’ views front and centre. There is a preview of the panel session on this topic at Investment Conference in this issue. We also showcase some of our stewardship work to date, including the annually updated PLSA’s Stewardship and Voting Guidelines 2023, published for members just ahead of this year’s AGM season, as well as casting an eye on what’s coming down the track.

So, whether you are interested in attending our events or the latest in pensions policy, this issue of Viewpoint has something for everyone.

Best wishes,

Julian Mund

IN 2023 WE’RE CELEBRATING 100 YEARS AS THE VOICE OF WORKPLACE PENSIONS

READ ABOUT THE FASCINATING BEGINNINGS OF THE PLSA: ON OUR WEBSITE OR IN VIEWPOINT

CELEBRATE WITH US AT THE PLSA ANNUAL CONFERENCE 2023

Fairness, adequacy and predictability

With Pensions Minister Laura Trott wasting no time in progressing her reform agenda for defined contribution pensions, there are signs she may next train her sights on decumulation.

THE CHALLENGE

Until 2015, accessing your pension meant – for most people – converting a pot of money into a guaranteed income for life. But since the pension freedoms,

over-55s have had a much wider choice over what to do with their pension.

With this increased flexibility has come complexity, with savers suddenly exposed to longevity, inflation and investment risks they’re poorly equipped to negotiate.

Vital support is already on hand through professional advice and guidance services, including those available to everyone at no cost, such as Pension Wise and Money Helper. But accessing these services requires an active decision from the retiree to seek

help and comes with capacity and/or cost constraints. As FCA data bears out, only around a third of people get the help they need.

THE SOLUTION

Our mission at the PLSA is to help everyone achieve a better income in retirement. As such we’d like to see all savers getting fuller support from their schemes and providers in decumulation. At present, due to regulatory uncertainty about the advice/guidance boundary, it’s sometimes riskier for schemes to try to help their members than to do nothing. This cannot be allowed to persist. That’s why we’re calling on government, regulators and the pensions industry to adopt the PLSA’s Guided Retirement Income Choices (GRIC), to support retirees with the complex decisions, irrespective of what kind of pension or provider they have.

Mark Smith, Head of Media Relations at the PLSA, explains why decumulation could be the next piece in the reform puzzle.

WE’RE CALLING ON GOVERNMENT, REGULATORS AND THE PENSIONS INDUSTRY TO ADOPT THE PLSA’S GUIDED RETIREMENT INCOME CHOICES (GRIC)

THERE ARE MANY BARRIERS TO IMPLEMENTING A BETTER FRAMEWORK FOR DECUMULATION, BUT NOW IS THE TIME TO OVERCOME THEM

The key elements of the framework are:

To guide and inform savers: via a saver engagement journey, informed by behavioural economics, and deploying a ‘path of least resistance’ that enables schemes to signpost savers to a retirement solution either inside or outside the scheme.

To deliver well-designed solutions: comprising a set of minimum product standards that require schemes, who are better able to than savers, to trade off the numerous and complex risks faced at retirement.

To support schemes to deliver the framework: minimum governance standards would underpin the design and delivery of the product and communications elements.

One product alone will rarely cater for an individual’s changing needs throughout retirement. Where they don’t take active decisions themselves, the proposed framework leverages the expertise of pension providers to default members into a suitable mix of cash, accessible investment products and, after a certain age, guaranteed income products.

This may simply mean providers signposting customers to a preferred set of decumulation products suiting their circumstances, or it could mean some firms innovating and offering access to all-in-one blended products.

Of course, there is a minority of engaged and informed savers who have more complex arrangements that require bespoke financial advice.

and options

Support to consist of three specific elements: member engagement and communications, decumulation products/solutions (in-scheme or signposted); and scheme governance processes relating to selection or design and delivery of the above elements

A set of minimum standards will apply to each element

WHAT NEXT?

The PLSA’s proposals require legislative change to introduce minimum product, communication and governance standards so providers can be confident they can provide DC decumulation solutions to their members which also stay on the right side of the advice/ guidance boundary.

Following the Pensions Minister setting out her reform agenda for DC pensions focusing on “fairness, adequacy and predictability,” the debate around decumulation seems to be picking up again, with a consultation expected before the end of the summer.

The PLSA will be bringing together representatives from the government, regulators, product manufacturers and advice/ guidance specialists to explore what standards might look like, to share best practice and help the whole pensions sector embrace any future new framework.

There are many barriers to implementing a better framework for decumulation, but now is the time to overcome them. Many of those retiring now have DB incomes to fall back on, but TPR expects DC assets to overtake DB in the next 15 years. Before we know it, the DC generation will be on the cusp of retirement. It’s only with proactive work now that we’ll be able to successfully introduce a saver-centred regime that can protect them from poor outcomes at retirement.

Requirement for schemes to support their members in respect of their at-retirement and decumulation decisions

Five Steps to Better Pensions: Steps 1, 2 and 3

In our ongoing series of articles about the PLSA’s Five Steps to Better Pensions consultation and report, Alyshia Harrington-Clark, Head of DC, Master Trusts and Lifetime Savings, explores Steps 1, 2 and 3.

At our 2022 Annual Conference in Liverpool, the PLSA published its Five Steps to Better Pensions: Time for a New Consensus report

In the report, we reviewed and assessed the current pensions framework and modelled the impact of a range of potential policy interventions, finding five key elements of reform that are needed to futureproof the pensions system. Acutely aware of the ongoing cost-of-living crisis, the recommendations provide a workable and appropriate roadmap for change.

The need for this work is backed up by PLSA research which shows that, despite the successes of automatic enrolment, without further reform more than 50% of savers will fail to meet the retirement income targets set by the 2005 Pensions Commission.

WHAT ARE THE PLSA’S FIVE REFORMS?

Our five reforms are:

1. CREATE NATIONAL OBJECTIVES FOR PENSIONS

2. REFORM THE STATE PENSION

3. AUTOMATIC ENROLMENT REFORM

4. SUPPORT UNDERPENSIONED GROUPS

5. INDUSTRY INITIATIVES TO ACHIEVE BETTER PENSIONS

This graphic below shows how those five objectives are interlinked.

Over the next few issues of Viewpoint, we’ll be exploring each of the five objectives in more detail. This article considers the first three.

1 2 3 4 5

1. CREATE NATIONAL OBJECTIVES FOR PENSIONS

The first change that’s needed is the creation of clear national objectives for the UK pension system that are adequate, affordable and fair.

This needs to be combined with regular formal monitoring of whether the UK system is on track to achieve these goals, which is key to future success for the sector.

The setting of national objectives would be a boost to both businesses and employees as it would provide greater clarity around pensions aims and objectives.

National objectives will also assist with ensuring that other changes to pensions, for example to automatic enrolment, are appropriate.

2. REFORM THE STATE PENSION

The second objective is a reform of the State Pension so everyone achieves at least the Minimum Retirement Living Standard (RLS), to prevent pensioner poverty.

This is an essential aim for the PLSA as the State Pension is a powerful instrument that’s relied upon by many millions of people in retirement.

The widely endorsed RLS is a good benchmark for any changes to the State Pension as it’s recognisable and easy to understand.

3. REFORM AUTOMATIC ENROLMENT

The PLSA also believes that reform is needed for automatic enrolment. We want to see more people reaping the benefits of saving into a workplace pension – and reforms to ensure more people are included, such as younger people, multiple job holders and gig-economy workers.

Also, at a higher level, we want to see changes to ensure that people on median earnings will be likely to achieve the Pensions Commission’s Target Replacement Rates.

These measures include saving from the first pound of earnings, and gradually increasing contributions from 8% to 12% from the mid2020s to the early 2030s, with contributions split evenly between employers and employees.

Expanding the scope and level of automatic enrolment is the top strategic policy objective for the PLSA in 2023, as it celebrates its 100th anniversary.

The team will also be considering the potential implications of a Private Members Bill introduced by Jonathan Gullis MP. The government has endorsed this bill, which seeks to partially reform automatic enrolment by giving the Secretary of State the power to reduce the qualifying age to 18 and remove the Lower Earnings Limit. The PLSA is fully supportive of this Bill, as it backs up our third objective.

At the time of writing, the Bill had passed its Third Reading in the House of Commons and is now being considered by the House of Lords.

WHAT’S NEXT FOR FIVE STEPS TO BETTER PENSIONS?

As consensus is vital for bringing about change, our report contained a consultation section which sought input on the proposals from interested parties. The consultation campaign closed on 31 March 2023 and drew engagement from a range of key crossindustry stakeholders, including Sir Stephen Timms MP, Chair of the Work and Pensions Select Committee.

Part of the campaign included a series of roundtables hosted by the PLSA which explored the five steps laid out in the report. Representatives from business organisations, parliamentarians, trade unions, trade associations and charities attended these sessions, which resulted in a robust exchange of ideas and debate. Alongside the oral feedback, we also received written responses.

NEXT STEPS

The policy team will now carefully review the feedback it has received and consider what it means for our proposals.

Given the ever-evolving political landscape and the need to maintain the positive momentum that has built up around our proposals, we intend to publish an updated edition of the report in October 2023 at our Annual Conference in Manchester. Ahead of the next General Election, the upcoming edition of the Five Steps report will play an important role in our campaigning efforts on adequacy.

We’d like to thank the Steering Group, Policy Committees, Reference Groups and the wider PLSA membership for their support and engagement with the consultation. In the next issue of Viewpoint, we’ll be exploring steps four and five in more detail.

THE FIVE STEPS TO BETTER PENSIONS REPORT

Read more about the PLSA’s Five Steps to Better Pensions: Time for a New Consensus report online.

ACUTELY AWARE OF THE ONGOING COSTOF-LIVING CRISIS, THE RECOMMENDATIONS PROVIDE A WORKABLE AND APPROPRIATE ROADMAP FOR CHANGE.

Trustees to the fore

Marcin Stepans, Events Content Manager, shares some insights from the PLSA’s first Trustee Forum event.

At the Pensions and Lifetime Savings Association’s Trustee Forum in March, chairs of trustee boards and senior trustee directors from some of the UK’s biggest pension funds, regulators from The Pensions Regulator and Financial Conduct Authority, and representatives of the PLSA gathered to share insight on the industry’s most pressing issues.

Discussions centred on good governance, systemic risks, and the changing regulatory landscape.

BURDENSOME DISCLOSURE

Given the many regulatory changes due to take effect this year in the pensions sphere, it will be important that what comes out is practical and results in good outcomes for members. But Forum attendees voiced concerns about the unintended consequences of increased regulation and disclosure, with some wondering whether trustee boards are turning into governance and compliance bodies.

Conversations honed in on what was seen to be burdensome, excessive and costly disclosure – particularly on smaller schemes – such as the Taskforce on Climate-related Financial Disclosures’ (TCFD) reporting requirements.

A particular worry is that TCFD reporting will require yet more documentation and information, but will fail to deliver

better value for members. Many flagged that the default answer to all pension issues seems to be more disclosure, and there were calls to ensure an appropriate balance.

The industry is still waiting for the DB Funding Code to be finalised. However, attendees raised concerns that much of The Pensions Regulator’s draft code, which is due to come into force in April 2024, assumes most schemes are closed to future accrual or close to their endgame. The code does not work so well for open schemes. For more information about the DB Funding Code, see page 17.

The PLSA is pleased that The Pensions Regulator has extended the implementation date to April 2024 from October 2023, as this will give schemes more time to prepare. We have also emphasised the need for more focus on open schemes.

LDI CRISIS HAS WIDERANGING IMPACT

Speakers at the Forum talked about the wide mix of outcomes for schemes over the months since the liability-driven investment (LDI) crisis in October 2022. Some schemes say they have seen a positive impact, while others have moved backwards.

Some are now in a better funding position than ever and closer to their endgame but will have to wait to go to buyout due to the recent market volatility and the rising proportion of illiquid investments in their portfolios as a result of collateral calls. There were also differences between how investment consultants and asset managers coped during the LDI crisis, and there is now an increasing need for daily-dealt funds.

Some of the positive things that trustees have achieved in the last 12 months include improved governance, a clearer direction of travel towards their endgame, and using the LDI crisis to increase their hedge ratio.

SYSTEMIC RISKS

When asked what keeps them awake at night, trustees cited concerns around the efficiency of some service providers, transparency, and staff resourcing issues.

The recent emergence of systemic risks in the banking system, highlighted by the problems at Credit Suisse and Silicon Valley Bank, is also causing trustees to worry, with some warning that visibility beyond the short term is difficult right now.

At the Forum, discussions centred on how trustees don’t have the time to take a step back and think about big systemic risks and potential contagion as they already have so much to do on a day-today basis.

One trustee highlighted the importance of thinking ahead as early as possible and commented that “we’ve become good at identifying key risks but not at accurately assessing risks when they’re bad.”

Another cautioned against looking to the past for lessons on what to do in the future, and that it’s better to prepare for generic events happening rather than specific risk events.

IS REGULATION HEADING IN THE RIGHT DIRECTION?

During the regulatory session, discussions turned to the increasing burden on both DC and DB pension schemes, with some suggestions that regulators are viewing them as systemically important entities.

One area of discussion was what does ‘value for money’ mean in DC schemes – that cost is only one part of value and quality of service is a critical point. Trustees pointed out that value for money is different in DC and DB schemes, and that it’s important not to treat both the same.

Attendees pointed out that there’s a difference in competition discussions at the regulatory level, and that there’s tension between regulating commercial pension providers and trust-based schemes.

SUPPORT FOR TRUSTEES

The PLSA supports trustees all year round through our events, lobbying, training and online resources. Continue to explore the themes from our Forum and get in touch to keep the conversation going.

TCFD REPORTING

Carbon emissions template – An Excel template that helps pension schemes meet their obligations under the Climate Change Governance and Reporting Regulations, and associated DWP Statutory Guidance, and to help insurers and investment managers fulfil their obligations under the FCA’s new ESG Sourcebook.

Towards a Greener Future: Case studies from the pensions sector –Pension funds set out their experiences, challenges, and some examples of how they’re responding to the climate emergency. They also offer advice for others who are facing the same challenges – including net-zero transitions, producing the first TCFD report, and the important role engagement plays in protecting investments.

A Changing Climate report and update: A system-wide assessment of the challenges facing pension schemes and their service providers, with recommendations for overcoming these challenges. The PLSA also produced an update summarising progress made towards the report’s conclusions.

Investment Conference: We have an Investment Conference session dedicated to ‘TCFD: from lessons learned to future outlook’, at 11.45 am on Wednesday 7 June.

DB FUNDING CODE

Consultation response: The PLSA’s response to The Pensions Regulator’s second consultation package on the new code.

Webinar: Watch a recording of our February 2023 webinar on preparing for the Funding Code.

Also see our article on page 17 for more detail on the new Funding Code.

LDI CRISIS OUTCOME

PLSA comment – Our views on the Bank of England Financial Policy Committee’s assessment of appropriate resilience in pension schemes’ use of liability-driven investment strategies.

VALUE FOR MONEY IN DC SCHEMES

Consultation response: Read our views on the January 2023 DWP consultation into value for money in DC schemes, as well as small pots, collective DC and review of the default fund charge cap.

Webinar: Sarah Smart, Chair of The Pensions Regulator, joined us for a webinar on value for money in DC schemes.

Our trustee training courses are also designed to help trustees keep up to date with the latest good governance practices and industry trends.

Should pension funds invest in UK growth?

Tgloomy outlook for the economy coupled with the burden of an ageing population appears to be increasing the frequency of calls for the UK’s pension schemes to step up and improve the country’s growth prospects.

In 2015 George Osborne asked LGPS funds to pool to bolster investment in infrastructure; last year the then-Prime Minister and Chancellor Boris Johnson and Rishi Sunak called for an investment ‘big bang’; and this March Baroness Ross Altmann called on the current Chancellor, Jeremy Hunt, to require pension schemes to invest a minimum in UK growth assets

In recent months, there seems to have been a shift in the political argument about pension scheme investing.

Matt Gibson, head of investment research at LCP, says: “Individuals are given a tax break on their pension investment so they can accumulate enough not to be a burden on the state in later life.”

But now politicians appear to be arguing that the state should see some advantages too. Gibson continues: “There are signs of a growing pressure on pension schemes to invest in the UK in order to justify the tax break.”

These calls for UK pension schemes to invest in the country’s growth assets represent, at best, confused thinking –and at worst a lack of understanding of the regulatory and market constraints which shape schemes’ investment strategies.

Joe Dabrowski, deputy director of policy at the PLSA, says: “The fundamental challenge is finding the sweet spot which matches pension schemes’ needs with the government’s requirement for investment into certain types of assets.”

Pension schemes must ensure any potential investment meets a trustee’s fiduciary duty, provides value for money, and gives the best possible outcome for members.

Dabrowski comments: “Recent calls for pension schemes to provide more capital have lumped all schemes into the same bucket.”

WHICH SCHEMES SHOULD INVEST?

Adam Saron, founder of Clara-Pensions, agrees: “It is very unclear which pension assets are supposed to invest in UK growth. Is it defined benefit or defined contribution schemes?”

The reality is the UK’s funded occupational pension scheme landscape is fragmented. Each of the three main categories - closed defined benefit (DB) pension schemes, open DB (including LGPS funds), and defined contribution (DC) schemes typically used for automatic enrolment - has a different approach to investment.

Deciding which pension asset base should be investing in UK growth assets is important because it will affect when the government wants this investment to happen.

Saron says: “If you want investment big bang now then you have to go after DB schemes because they are the largest asset base.”

But it is far from certain DB schemes will want to invest. Dabrowski points out that: “The ability of a closed DB fund to invest in growth assets will depend on how close it is to buyout.”

A scheme less than 10 years away from transferring its assets to an insurance company is unlikely to want to add additional illiquid assets, such as infrastructure, to its portfolio.

“A scheme would only want to add this type of assets if they were to generate returns as well as be able to transfer them to an insurance company,” says Dabrowski.

The number of closed DB pension schemes which want to add more alternatives to their portfolios has recently decreased. Katie Sims, head of alternatives at WTW, says: “Thanks to the disastrous mini-Budget of last year, many pension schemes find themselves with a much shorter time horizon to buyout than they thought they had. That is not conducive to them increasing allocation to illiquid investments.

“In addition, many schemes are now over-allocated to alternative investments because the value of both assets and liabilities have fallen and schemes had to sell liquid assets to maintain collateral positions,” adds Sims.

Not every closed DB scheme, however, will be thinking about buyout. Dabrowski says: “Some schemes are aiming for

Charlotte Moore gauges the sector’s opinion on a complex question.

Finding relative value in private markets through active portfolio management

Traditionally, private markets investing has been characterized by a rigid asset allocation policy that fails to tap into new waves of opportunity as they emerge. In today’s constantly evolving world with investors navigating fresh challenges, why shouldn’t investment portfolios and return targets dynamically change too?

Relative value investing involves tactically adapting a portfolio so that it can capitalise on the most attractive market opportunities. In practice, this means moving overweight or underweight across different regions or asset classes relative to the initial strategic asset allocation. This agility can be very accretive to portfolio returns: our own analysis has shown that pivoting towards a relative value approach has historically added 100-150bps performance p.a. to multi-asset private market mandates over the last 5 years.

Unlocking relative value requires three pre-requisites:

1. Implementing relative value requires investors to take a view. Significant resources and expertise are required to map out a universe, before credibly deciphering between the various different areas.

2. Once a view is established, the investable universe must be determined, and this must be wide and varied enough for managers to be able to scan and assess new opportunities in order to execute their view.

3. Finally, a strong and consistent flow of new investment opportunities is critical for managers to implement their views. Without a surplus of quality ideas, managers may fall short on their ability to translate their views into tangible investments.

In this environment, private market multi-asset strategies represent an attractive alternative to traditional funds, thanks to their structure that enables them to capture the most compelling ideas in the market. Underpinning this is the idea of flexible investment pacing which allows managers to adjust investment pace in line with the prevailing market environment, introducing the possibility of adding additional alpha. This may be through by deploying more capital in attractive market environments, or slowing down deployment in more challenging ones.

To show how a dynamic relative value strategy can increase long-term returns, we consider a real-world multi-asset private market fund:

This chart shows how new money was deployed over time, relative to the portfolio’s strategic asset allocation. Over the past 10 years, such relative value calls have added over 150bps per annum to investment-level returns1

Relative value can be an important source of additional alpha for private markets investors. Investors should consider the extent to which a manager has the flexibility, resources and dealflow to seek and identify the most attractive opportunities at the outset: do investment guidelines enable relative value? Can the manager credibly take views? Are they equipped to implement them effectively? By keeping these questions in mind, investors can put themselves in the best position to benefit from relative value over time.

1. Source: Partners Group (2022): Performance measured 31 December 2016 – 31 December 2021 across 10 Partners Group mandates investing across at least 2 private markets asset classes with a > 5 years track record.

self-sufficiency and will exist for up to another four decades, and will therefore be able to take the risk of investing in growth assets.”

Open DB schemes have more than £300 billion of assets, and their investment time horizons are a good match for growth assets.

Dabrowski says: “In recent years much of the interventions have been focused on DC with this part of the DB market neglected despite managing the same size of assets.”

In comparison to DC funds, these open DB funds will have more mature investment strategies and bigger resources as well as more experience in these markets, he adds.

WHO IS ALREADY INVESTING?

In fact, LGPS funds are already investing in UK assets. Dabrowski says: “The governance set-up – with councillors sitting on pension committees as well as regional pool structures – has led to a concentration of investment in local infrastructure projects such as student accommodation.”

James Brundrett, senior investment consultant at Mercer, says: “For example, Cornwall has a local renewable energy investment while Clwyd have joined with Manchester in their regional private equity fund which has made two investments in North Wales.”

Automatic enrolment DC funds also have long time horizons which are a good match for growth assets but have been reluctant to invest in more expensive asset classes.

Dabrowski says: “DC is a nascent market so while it has had rapid growth over the last decade, it lacks the expertise which comes with maturity and scale.” Only now are funds getting to the size which makes it feasible to invest in a broader range of assets.

Saron agrees: “DC assets will grow but it will be over time.” And it is not all DC funds which will be able to invest in these asset classes – it is those with sufficient scale and resources. In other words, only the master trusts. “These are currently still growing their assets,” added Saron. The government wanting DC schemes to invest in growth assets is putting the cart before the horse. Saron says: “It’s not until a DC scheme is big that it has sufficient resource and the ability to source good deals.”

DC schemes are essentially a cottage industry which is trying to compete with international behemoths for growth assets. “Not every problem can be solved with scale, but it makes it much easier,” adds Saron.

Brundrett comments: “Australia is good example of where scale allows DC schemes to become more sophisticated investors.”

Scale is not the only issue holding back DC schemes. Despite increased regulatory scrutiny of value for money, cost remains the key metric used to secure market share, resulting in an over-reliance on passive equities and a reluctance to include more expensive strategies.

Brundrett says: “There needs to be a greater focus on creating higher-quality, member-focused outcomes in DC schemes because at the moment there is a race to the bottom driven by fees.”

This is at odds both with using more expensive alternative assets and a value-for-money assessment of scheme members’ retirement outcomes, he adds. Liquidity has also been an issue. Many DC schemes rely on platforms with daily dealing requirements. This is a mismatch with the illiquid nature of infrastructure, private equity and venture capital.

Nor is it certain where the UK government wants pension schemes to invest. Saron says: “Infrastructure, private equity, venture capital and biotechnology have all been mentioned but they are very different markets.”

Even if pension schemes were to allocate more to growth assets, it is highly unlikely they would allocate assets only to the UK. As Gibson points out, “The UK venture capital market is not large enough for all pension schemes to invest in.” He adds that pension schemes would rather invest any asset globally in order to diversify.

Gibson continues: “For the majority of schemes, putting a significant allocation into UK assets does not make sense from an investment perspective. We welcome initiatives to facilitate investment, but if the government wants to mandate it, the industry is likely to resist strongly.”

Dabrowski concludes: “Pension scheme investment cannot be thought of as a silver bullet. Many of the issues which ail the UK economy today are systemic issues which need to be addressed with careful thought and plans.”

THE FUNDAMENTAL CHALLENGE IS FINDING THE SWEET SPOT WHICH MATCHES PENSION SCHEMES’ NEEDS WITH THE GOVERNMENT’S REQUIREMENT FOR INVESTMENT INTO CERTAIN TYPES OF ASSETS

Flexible Thoughtful Connected

The Defined Benefit Funding Code: Q&A

THE SPEAKERS

Q.

WHAT ARE THE KEY OUTSTANDING CHALLENGES FROM THE LATEST DB FUNDING CODE CONSULTATION? A.

FRED BERRY: Our consultation, which closed on 24 March, has generally been well received by the industry. We’re now carefully considering responses to identify where we can be clearer, and where we can develop our thinking further. We’ll then look to finalise the Code to reflect these responses and the final regulations over the coming months. We’ll continue to engage with industry throughout.

We’ve been clear that we and the industry will have enough time to prepare for the changes which result from the Funding Code. To ensure this is the case, we now expect the regulations and the Code to come into force together in April 2024.

Of course, it’s also important for trustees to understand what evidence and explanation will be required in the Statement of Strategy. In the summer, we’re planning to consult on the information we want to collect and how we’re going to collect it to ensure it is as un-burdensome as possible, while giving us what we need to carry out our duties appropriately.

MARTIN HUNTER: One of the key outstanding challenges relates to the treatment of open DB schemes in the draft DB Funding Code and the DWP’s draft regulations. While I’m pleased to see the draft Code state that the scheme actuary can include some allowance for new entrants and future accrual when projecting the maturity of open schemes, I believe this allowance would need to be limited in order for open schemes to comply with the proposed legal requirement for all schemes to set a “relevant date”. Limiting this allowance could lead to a material increase in costs for many open schemes, potentially threatening their viability, and damaging the retirement outcomes of many current and future pension savers.

RACHEL PINTO: While the draft Code contains some welcome flexibility, there are several areas where it appears to be at odds with the draft regulations. For example, while the Code indicates that trustees retain the right to set their own investment strategy, the draft regulations suggest that trustees are required to adopt a low dependency asset allocation on and after the relevant date regardless of the circumstances. Similarly, a court might well take a narrower view of what constitutes a “highly resilient” investment strategy for the purposes of the regulations, compared with the strategies permitted under the Code.

TIFFANY TSANG: We’re pleased that the new DB funding regime is developing and taking shape. However, one of the big challenges for the industry has been around the consultation on the Code taking place without having settled regulations in place. This has made it difficult for the industry to determine how some of the final requirements will end up and therefore adds extra challenges for trustees to try to prepare for these reforms.

FRED BERRY Lead Investment Consultant, The Pensions Regulator

MARTIN HUNTER Head of Integrated Funding, Railpen

ROB ORR Head of Technical and Comms, SAUL Trustee Company and Chair, PLSA DB Committee

RACHEL PINTO Partner, Herbert Smith Freehills

TIFFANY TSANG Head of DB, LGPS and Investment, PLSA

Leading industry commentators share their thoughts on the forthcoming Defined Benefit (DB) Funding Code and its implications for pension schemes.

The general feedback from our members was that more time is needed by the industry to consider all the implications of the new funding regime, and for trustees to work with employers to determine how best to comply with the new requirements, so the six-month deferment to the commencement date of the Code and the regulations is welcome.

Q.

WHAT WOULD BE TOP OF YOUR WISH-LIST FOR THE FINAL CODE? A.

FRED BERRY: There’s really only one thing on our wish-list, and that’s for our Code to genuinely help trustees plan for the long term and put themselves in the best position to pay the benefits promised.

We recognise the backdrop has changed since our first consultation and we’ve had plenty of opportunity to see if our approach works in the real world. But we continue to believe that the purpose and direction of the DWP regulations and our Code remains the right approach. Long-term planning and risk management remain key tenets of good scheme management across all market conditions.

As for the detail of the Code, once we’ve considered responses to our consultation and have seen the final regulations, we’ll know where we’ve got it right, and where we might need to develop our thinking further.

MARTIN HUNTER: I would like to see the DWP’s regulations amended to explicitly state that the scheme actuary can include a reasonable allowance for new entrants

and future accrual, when projecting a scheme’s maturity into the future. Schemes which are not expected to mature over time, as may reasonably be the case for some open schemes, should be made exempt from the requirement to set a relevant date and target low dependency by this date.

ROB ORR: I’d like the final Code to continue to adopt a flexible approach. For me, this is particularly relevant for those schemes that are not maturing, or have a very long time-horizon before reaching the point of significant maturity.

RACHEL PINTO: The other key issue that needs to be resolved is how significant maturity is determined. Duration for many schemes has reduced in recent times and the current methodology for measuring duration is too volatile, making it unsuitable as a reference point for strategic planning. Therefore, it is essential that the government and the Regulator adopt a more stable measure of maturity.

TIFFANY TSANG: The flexibility in the draft Code and TPR’s pragmatic approach to interpreting many of the requirements in the regulations is definitely welcome. But one of the main concerns of our members is that the Code assumes most schemes are closed and moving to end-game in the not-toodistant future. As a result, the various requirements that relate to open schemes are spread throughout the whole Code. Based on feedback from PLSA members (60% of those we recently surveyed), we believe it would be very helpful for open DB schemes if all the requirements that are relevant to them were packaged together in one section/chapter within the final Code. The same applies to the requirements for multi-employer schemes.

Q. WHAT SHOULD DB SCHEMES BE DOING NOW TO PREPARE FOR THE CODE? A.

FRED BERRY: We now expect the new requirements to come into effect in April 2024. As the changes will be forwardlooking, only schemes with valuation dates after the commencement date will be affected.

This means the existing code and related guidance will remain in place until then. We recently published our latest Annual Funding Statement (AFS), which provides specific guidance on how to approach valuations under current conditions.While the regulations and Code are finalised, there are still steps trustees can take to prepare. Trustees should consider, if they haven’t already, adopting a long-term funding target, agreeing it with their employer, and setting their journey plan to reflect this. There is more detail in our AFS.

RACHEL PINTO: While we can expect some changes in the final Code and regulations, the direction of travel is clear. Therefore, trustees and sponsors of DB schemes should assess the potential impact of the new regime on their scheme and its funding arrangements. They should also assess how close their scheme is likely to be to reaching significant maturity, as this will determine, to a large extent, how immediate the impact of the new regime will be.

ROB ORR: Although the final Code will apply to valuation dates after implementation, it would be sensible for trustees and employers with current (or

WE’RE NOT LOOKING TO RESHAPE THE DB LANDSCAPE, BUT TO EMBED THE EXISTING GOOD PRACTICE WE SEE IN THE MARKET

imminent) valuation dates to be thinking about the themes coming out of the draft Code and how these might be applied to their schemes in practice now.

TIFFANY TSANG: There are a number of things that trustees could be doing now, ahead of the April 2024 commencement of the new DB funding regime. We believe they should take advantage of the six-month deferment to work with their employers and advisers to determine how best to comply with all the new requirements.

It’s important to point out that not all DB schemes are the same or are at the same stage in their journey to maturity (in terms of duration, how they measure risk etc). For some trustees, the new funding regime and covenant requirements will have a significant impact on how they approach assessing covenant and will have a knock-on effect on how they manage risk in their scheme, while for others it may simply reinforce the procedures which they already have in place. But regardless of what stage schemes are at, early preparation by trustees will be important to a successful transition to the new funding regime – particularly for those schemes with valuation dates shortly after 1 April 2024.

Q.

WHAT DO YOU THINK WILL BE THE BIGGEST OPERATIONAL CHALLENGE FOR SCHEMES? A.

FRED BERRY: We’re not looking to reshape the DB landscape, but to embed the existing good practice we see in the market.

However, we recognise there will be change for all schemes, and we’re considering the impact of this and how we support trustees as they transition into the new regime. This includes reviewing our associated funding guidance and how we might engage with schemes approaching their valuation. One area of change will be how trustees approach providing more and different information in their Statement of Strategy (SoS). We have a team dedicated to getting the balance right between the SoS being a useful tool for schemes and getting the information we need to regulate effectively while not unnecessarily increasing trustee burden and cost. We have already started engaging with industry ahead of our consultation – if you’re interested in getting involved, please follow the link or scan the QR code at the bottom of the article.

MARTIN HUNTER: One of the biggest operational challenges for schemes is likely to be time. The new requirements of the DWP’s draft regulations and the expectations of TPR’s draft DB Funding Code are likely to involve a significant amount of time, resource, and therefore cost, for schemes. Part of this challenge will be due to any additional steps to develop the funding and investment strategy (although much of this is likely to be considered already by many schemes). Another part will be due to the additional time taken to properly record and report the funding and investment strategy, and part will be due to the additional elements that will need to be agreed or consulted on with employers.

ROB ORR: Although the operational challenges will only really be known once the regulations and Code are in force, the Code is likely to lead to an extra

compliance burden for trustees and employers. One way to help would be for TPR to produce a template or checklist showing the types of information to include in the necessary Statement of Strategy in future, given the amount of information required to be provided.

TIFFANY TSANG: A number of PLSA members (40% of those we recently surveyed) believe that the inconsistencies between some of the requirements in the Code and the regulations are particularly problematic, and pose one of the biggest operational challenges for schemes. As things stand, there’s concern that compliance with the draft Code may not necessarily result in compliance with the regulations (as they’re currently drafted). It will be important for the industry to have consistency between the requirements in the Code and the regulations, to give trustees certainty about how to implement the reforms. And where such inconsistencies exist, in our view the regulations should be amended wherever possible to reflect the (more flexible) Code requirements.

ONE OF THE BIGGEST OPERATIONAL CHALLENGES FOR SCHEMES IS LIKELY TO BE TIME

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Image: FURTHER SPACE which received investment from the Foresight Scottish Growth Fund in 2021

Stewardship and responsible investment 2023

The policy and media spotlight continues this year on responsible investment, a complex arena which the PLSA remains committed to, seen most prominently in our stewardship work. Here we showcase some of our work to date, and we cast an eye on what’s coming down the track.

TASKFORCE ON SOCIAL FACTORS

The PLSA is a member of DWP’s Taskforce on Social Factors, which was officially announced in Q1 2023 and aims to support pension scheme trustees and the wider pensions industry to identify, assess and manage the risks and opportunities around social factors in the investment process. Pinning down reliable data sources and metrics will be key; the taskforce also seeks to review issues such as labour rights as they pertain to health and safety, the supply chain and modern slavery, and inclusion and diversity. Many of these issues also feature as central themes within the PLSA’s own Stewardship and Voting Guidelines.

PLSA STEWARDSHIP AND VOTING GUIDELINES 2023

The PLSA published its annual guidelines in Q1 2023, to contribute to the work that pension schemes do in preparation for the Annual General Meeting season. The guidelines are designed to help pension fund trustees, investment managers and other institutional investors.

Each year, the PLSA reviews new regulations and trends on shareholder engagement to make sure schemes can make the best of their stewardship and voting opportunities.

Besides covering well-established topics such as board leadership and audit quality, the 2023 edition of the guide has a new chapter on workforce, taking stock of what companies should consider beyond the minimum when it comes to their employees’ wellbeing. The new edition also considers recent political and economic circumstances, with the cost-of-living crisis bringing a renewed focus on executive pay, while climate change continues to be at the forefront of investors’ minds and so features heavily. The document also sheds light on progress made in ethnic and gender diversity, but the PLSA believes more can be done; pension schemes are asked to consider what more they could do to move the dial towards greater equality.

VOTE REPORTING GROUP

The PLSA is also a contributing member of the Vote Reporting Group, which aims to enhance shareholder vote reporting by UK asset managers. The group is designing a comprehensive and standardised vote reporting framework for public consultation in mid-2023. It will consider key fields required, voting categories, inclusion of rationales for voting, the supporting technology, and where it should be hosted. This standardised approach should reduce the level of individual or ad-hoc vote reporting and allow for greater ease of comparison. It is also intended to help to ensure good outcomes in line with the FCA’s Consumer Duty and will align with the FCA’s ESG ‘transition’ theme for effective stewardship.

TOWARDS A GREENER FUTURE

The PLSA has been a frontline voice on climate change investment risk issues, publishing work such as Towards a

Greener Future to help provide resources on this evolving issue; we will continue to monitor this landscape.

Most recently, the government’s 2023 Green Finance Strategy confirms the commitment to develop the country’s green financial market. The document made a number of pledges, including the following:

• A review of the Stewardship Code in Q4 2023 by the FRC, working with FCA, DWP and TPR, assessing whether the Stewardship Code is creating a market for effective stewardship.

• A UK Green Taxonomy will be a tool to provide investors with definitions of which economic activities should be labelled as green. Consultation is expected in Autumn 2023.

• Government will publish a thematic review of TCFD-style reports produced by schemes in scope.

The PLSA will remain close to these stewardship and investment issues and will seek to ensure that our members’ voices continue to be represented and that savers’ outcomes remain protected, while also keeping an eye on how we can contribute towards greater collective public goods where possible.

Maria Espadinha, Senior Policy Advisor and Tiffany Tsang, Head of DB, LGPS and Investment report on progress towards a greener and more just future.

CLIMATE CHANGE CONTINUES TO BE AT THE FOREFRONT OF INVESTORS’ MINDS

THE MEMBER BACKING PENSIONS AND LIFETIME SAVINGS ASSOCIATION

SPEAKERS INCLUDE:

THE UK’S LARGEST EVENT FOCUSED ON PENSION FUND INVESTMENT

6 - 8 JUNE I EICC I EDINBURGH

The PLSA Investment Conference 2023 brings together the full pensions investment chain to discuss the big picture challenges and sector-specific issues for pension fund investment.

The conference also offers the best networking opportunities in the pension industry. Expect to share insights and connect with other pension scheme leaders.

FREE FOR PLSA FUND AND MASTER TRUST MEMBERS

www.plsa.co.uk/Events/Conferences/Investment-Conference

EMMA DOUGLAS LUBA NIKULINA

ROBERT PESTON RORY STEWART

Building the future of the LGPS

It’s a year since the publication of the PLSA’s report into the challenges and opportunities facing the LGPS. Tiffany Tsang explores what’s changed and what still needs attention to ensure the operational sustainability of the scheme.

The Local Government Pension Scheme (LGPS) is the largest defined benefit (DB) pension scheme in the UK, and one of the biggest in the world. It has assets totalling more than £332 billion, and provides pension benefits to 6.9 million members across more than 17,000 employers.

For more than a decade, the LGPS has undergone continuous, rapid change. Against a backdrop of the world financial crisis, austerity and pay freezes for local authorities – and, more recently, the global pandemic – it has had to contend with a rolling series of reforms. These include becoming a Career Average Revalued Earnings (CARE) Scheme for future accrual, transitioning to investment pooling, incoming responsible investment regulations and the impending implementation of the McCloud judgment.

In 2022, we published our independent in-depth report, The LGPS: Today’s Challenges, Tomorrow’s Opportunities. The report provides information for PLSA members and those with an interest in the LGPS to inform ongoing debates about the scheme’s purpose and how to prioritise its challenges and opportunities. It also includes practical action points and next steps.

In the report, we identified four key themes:

• The LGPS regulatory and operating environment – The LGPS operates within a complex government and regulatory landscape. The pace of change it has had to react to and comply with has accelerated in the last few years. There should be a significant push to ensure the existing regulatory framework works in a more joined-up and coherent way. The benefits of a more centralised approach – which could involve creating a new regulatory body, or giving an existing body greater powers – should be examined.

• LGPS employers – While the relationship between funds and employers is reported as being overall very positive, the diverse range of employers in the scheme – all with varying needs – has increased administrative complexity. Among a range of recommendations within this theme, the PLSA calls for additional work to explore and share best practice in both assessing and proactively communicating employer risk and employer responsibilities early on. This work could also help to manage employer exits where appropriate, building on what is already available.

• LGPS and scheme members –The LGPS helps provide an adequate retirement income for workers, many of whom are among the lower paid, and provide essential services that allow local communities to thrive. It is committed to continuing to promote how valuable it is to those members. The PLSA recommends obtaining a robust and granular understanding of LGPS membership profiles, and for LGPS savers’ voices to be represented at a more macro level in regulatory, policy and political discussions relating to pensions.

• Operational sustainability: systems and people – Amid ongoing cost constraints on local authorities, competition for talent is fierce. Recruitment, retention and resourcing remain top priorities to ensure that the LGPS continues to have the right skills to navigate through the changing regulatory and operational environment. The PLSA recommends a review of its 2018 Talent Management Guide, and to share best practice in people management.

THE MEMBER BACKING PENSIONS AND LIFETIME SAVINGS ASSOCIATION

PLSA LOCAL AUTHORITY CONFERENCE 2023

26 - 28 JUNE 2023

DE VERE COTSWOLD WATERPARK, GLOUCESTERSHIRE

The must-attend event for anyone involved in the Local Government Pension Scheme, covering practical challenges and future opportunities in the ever-evolving landscape of local authority pensions. Three days of thought-provoking discussion, best practice and networking.

SPEAKERS INCLUDE:

www.plsa.co.uk/Events/Conferences/ Local-Authority-Conference

KATY BALLS

ANTHONY PARNELL

ADAM RUTHERFORD

KAREN SHACKLETON

WHAT HAPPENS NEXT?

A year on from publication, the PLSA is reacting to the report’s recommendations by implementing a series of short to medium-term projects and events. Some key examples of the actions we’ve already taken and our proposed next steps, for both funds and the PLSA, include:

THEME RECOMMENDATION ACTION

Regulatory & Operating Environment

Carry out regulatory mapping to help highlight to external stakeholders the complexities in which the LGPS operates.

PGIM_FI_ Brand_22BRR84_

LGPS Employers Funds should proactively provide information and assistance to existing and prospective employers to help them understand their responsibilities and risks when joining the LGPS. Employer risk guidance should be accessed and managed, to share best practice within the LGPS. Funds should actively and regularly explain LGPS benefits to employers.

LGPS and Scheme Members

Understand what tools from the Money and Pensions Services (MaPS) could be used to support the needs of LGPS scheme members.

The mapping will be published in June.

Once the map is completed, we’ll set out a lobbying plan within the PLSA Executive for longer-term plans that will seek to open dialogue with government and regulators about utilising a more joinedup, centralised approach.

PLSA Employer Guide 2017 update to be published in June 2023.

In the medium term we’ll explore creating best-practice case studies on how to work with employers on entrances and exits, and case studies on employer engagement.

LOCAL AUTHORITY CONFERENCE PREVIEW

Join us for the PLSA’s Local Authority Conference 2023 – the largest event of its kind dedicated to the LGPS. Over the course of three days in the Gloucestershire countryside, the event will cover practical challenges and future opportunities in the ever-evolving landscape of local authority pensions. We’ll be taking the temperature of the LGPS and exploring how macroeconomic uncertainties, the cost-of-living crisis and levelling up will dominate the future work of the scheme.

Katy Balls, political editor at The Spectator, will give us the inside scoop on the impact of the UK political scene; and Adam Rutherford, scientist, writer and broadcaster, will be our afterdinner speaker at the conference Gala Dinner.

The issues we’ll be exploring include:

• What’s the investment outlook for funds amid recent market turmoil and the continued threat of recession?

We held a webinar with MaPS in Feb 2023 on how to communicate with savers during the cost-of-living crisis.

We’ll be extending this theme at the Local Authority Conference with a session on the Cost-of-Living Conundrum: Communicating with Employers and Savers

• How can we ensure operational sustainability of the LGPS when funds are continually pushed to do more with less?

• How should funds communicate with employers and savers during the cost-of-living crisis?

• What’s next on ESG, pensions dashboards and the levelling up debate?

Come to the conference to find out more and take part in thoughtprovoking discussion, best practice debates and networking with your LGPS peers.

Operational Sustainability

Carry out a best-practice case studies project on recruitment and retention.

The PLSA carried out a webinar at the end of 2022 with case study funds sharing how they have successfully attracted and retained younger talent.

We’ll aim to produce a best-practice case studies document, based in part on some of the approaches we heard at the webinar.

Can pension funds act for the public good?

Luba Nikulina, Chief Strategy Officer at IFM Investors, explains how pension schemes’ long-term investment horizons mean they’re ideally placed to invest in ways that benefit society and the environment.

Pension schemes’ overall purpose is to deliver retirement income so that members can enjoy later life. Open pension schemes are long-term investors deploying patient capital. It is in this role that they make their wider contribution to the economy and society.

Long-term investment horizons are crucial if the existential challenges of climate change and related social and economic risks are to be successfully addressed. Pension capital is better placed than most to play this role. Overall, our financial system is focused on short-termism and that can lead to inferior return outcomes for pension scheme members while also being an obstacle to sustainable economies and societies.

This may be evidenced through lower returns across the portfolio over the long term, as well as elevated short-term volatility which can further influence short-term thinking, leading to a continued pattern of poor decisions.

Many large pension funds can now be considered universal owners, i.e. institutional investors that have become so large they own a slice of the whole economy. They can’t stock-pick their way out of climate change and other social issues that challenge sustainable outcomes. And they can’t swerve systemic issues that affect the entire economic system – and beyond – such as inequality and biodiversity loss.

These risks are impossible to diversify away from; only active engagement by long-term motivated owners can effectively meet this challenge.

HOW CAN PENSION SCHEMES SUPPORT CLIMATE-AWARENESS AND SOCIAL REGENERATION?

There is a concern that current markto-market securities prices may not adequately encompass the financial risks of climate change. This reflects externalities which are hard to quantify ‘in the price’, e.g. the cost of carbon emissions in the absence of effective global carbon pricing.

Pension capital, as long-term investment on behalf of successive generations of citizens, looks beyond the short-term vagaries of markets to the longer-term risks, such as that of stranded assets in a disorderly transition. Calibrating these risks is a role that pension schemes can perform, but they can also use the wider market short-termism as an opportunity to outperform on behalf of their members. Equally on the social side, evidence is growing that sustainable value creation is enhanced by, for example, fair work practices. In knowledge economies, nurturing human capital is critical to long-term success.

POTENTIAL UNINTENDED CONSEQUENCES?

There is a possible danger that too much is expected of pension schemes, whose purpose is to deliver retirement incomes and who must therefore always have longterm financial returns in the foreground. Pension trustees play a crucial role here in ensuring a sustainable investment strategy.

Impact investing is an interesting area in which doing well and doing good are aligned. The challenge can be in measuring success or otherwise. Protecting long-term future investment outcomes involves taking on systemic issues, such as climate change. And

this, in turn, involves pursuing realworld impact to nurture the health of fundamental systems.

Consciously pursuing impact means active ownership, investing in solutions, engaging with policymakers, and working jointly with other institutions to bring about change. Part of this change should also include working with the stewards of pension assets on providing greater data transparency which can help quantitatively evidence the financial benefit of effective socially-aware investing.

Luba Nikulina will be taking part in the Pension Funds Acting in the Public Good panel debate at 10am on 8 June at the PLSA’s Investment Conference 2023.

SOCIALLY-AWARE INVESTING – MORE INFORMATION

Worthwhile workforce reporting: good practice examples from the UK’s biggest companies Find out more about what constitutes good working practices and reporting methods in this joint report from Railpen, the High Pay Centre, the CIPD, the PLSA and Board Intelligence.

Investment relationships for sustainable value creation

Read the PLSA’s stewardship recommendations for managing each stage of the relationship between investment managers and asset owners, to help deliver better returns for savers.

Harvesting the middle: The alpha in mid-market infrastructure

Infrastructure has traditionally been associated with large-scale assets essential for any well-functioning society including airports, roads, ports, and utilities. These crown jewel assets attract significant sums of capital from large infrastructure funds, however, there exists opportunities for investment beyond the mega assets. Deals within the mid-market can offer a comparative advantage over their larger peers.

The Mid-Market

The definition of the infrastructure mid-market is a subjective one, with classifications varying between investors, and ever-evolving as average transaction sizes increase due to larger pools of investible capital, inflation, and multiple expansion.

PATRIZIA considers the mid-market of infrastructure as deals of less than €1 billion in enterprise value at entry, or funds of less than €3 billion in equity.

“PATRIZIA has been investing in the mid-market for over two decades,” said Justin Webb, Managing Director of Investment Solutions. changing landscape, we see the midmarket as a space where we have expertise, and one where we can continue to deliver attractive returns for our investors.”

A Strong Performer

Performance data on infrastructure funds shows mid-market core and core-plus

deals, paving the way for mid-market managers to discover attractive investment opportunities.

connections, an increase in the district heating production cap, and an increase in the maximum load factor.

On the back of this success, PATRIZIA extended the capacity of the existing incinerators and added a new incinerator in order to increase capacity by 67% to 256GWh from a previous level of 153GWh. In 2022, PATRIZIA successfully merged KVAS with SAREN Energy AS, another district heating operator in Tromsø. The valuation of KVAS almost doubled in 2022, as a result of the merger and the expansion project.

Opportunity Sets

Allocating to mid-market funds can unlock a diverse set of investment sectors. Mid-market and large-cap infrastructure investors cannot practically access the same opportunity set, which is likely to be contributing to mid-market alpha.

Over the last 12 months, most deals within the infrastructure mid-market were in the renewable energy space, particularly solar and wind, whereas large-cap infrastructure focused largely on the telecommunications, gas and oil industries.

PATRIZIA has identified four key macro trends for infrastructure in the long term: decarbonisation and the energy transition, digitisation, demographic change and urbanisation, and climate change. The alignment of these trends with the opportunity set available to mid-market investors paints a favourable outlook for mid-market strategies.

Lower Entry Multiples

Mid-market transactions are cheaper, with lower entry multiples than their large-cap peers. As part of its strategy, PATRIZIA works to transition assets from mid-market to large-cap assets.

coverage arrangement.

After the purchase, a PATRIZIA employee was appointed as an interim CEO until a new management team was in place. In further active management decisions to move the mid-market company towards large-cap, both in terms of asset size and operational characteristics, PATRIZIA grew the asset from 172 properties to more than 317 units, creating substantial value.

ability to moderate the downside risk of the investment.

When asked whether investors should pursue large-cap or mid-market infrastructure strategies, Webb responded, “Mid-market funds deserve a seat at the table. The inclusion of a proven mid-market manager alongside a large-cap manager can provide greater diversification benefits and improved risk-adjusted returns.”

Designs of distinction

Lisa Young-Harry, Trustee Chief Operating Officer of HSBC Bank UK Pension Scheme, explains how communications and member understanding made it a contender for the PLSA’s 2022 Pension Quality Mark Distinction Award.

HSBC Bank UK Pension Scheme’s trustee board takes its role in managing the scheme very seriously, and has recently updated its mission statement to include two member focussed priorities:

• To help members to make well informed decisions about their retirement savings

• To deliver an excellent service experience for members

Engaging communications are key to achieving these goals. We believe that we must thoroughly understand

our membership’s demographics and implement a communications strategy tailored to their differing needs and expectations.

ANALYSING MEMBER DEMOGRAPHICS

The trustee board regularly monitors our member demographics. Using LCP’s Horizon technology we can look at realtime data on a variety of key metrics, from member contributions by age, salary, gender and tenure, to member investment and retirement decisions.

We use our data analysis to segment our membership and build a suite of email nudges that are automatically triggered by specific events in their careers. In a single click, these nudges take members from their email account to the tools and pages of our scheme website, futurefocus (https://futurefocus.staff.hsbc.co.uk), that are relevant to them.

Our average nudge open rates are over 70% and our website visits continue to increase, with an average of around 50,000 visits to futurefocus each quarter.

ABOUT THE SCHEME

HSBC is one of the world’s largest banking and financial services organisations, serving approximately 39 million customers globally. The bank employs approximately 35,000 people in the UK and works hard to ensure that its workplace is an inclusive, diverse and meritocratic environment.

HSBC offers a defined contribution scheme for current employees including a generous bank core contribution as well as pound for pound matching up to 7% of pensionable salary. The scheme has over 170,000 members and assets of over £37.5 billion as at December 2021.

REGULAR MEMBER SURVEYS

We run regular member surveys and focus groups, with our latest survey taking place in 2022. We use member feedback to help with the design of our communications strategy and to plan new initiatives and campaigns for the year ahead.

SUPPORT FOR NEW JOINERS AND MID-CAREER MEMBERS

Member survey feedback told us that our regular intakes of new joiners wanted more information, including simple, short explanations of how the scheme works, projections of the

future value of their contributions, explanations of how to use their personal pension account, My Pension, and help to set a saving target.

In 2022 we developed a range of tools for new joiners including a quick start guide that explains the pensions basics in simple terms, a new joiner induction video, and a new joiner website page. Our regular data analysis also showed us that taking a mid-career contribution break or going part-time can significantly reduce a member’s DC pension pot. In 2022 we launched a bespoke scheme pensions saving ‘MOT’ for mid-career members. This included a simple interactive guide and checklist to help members take control of their savings.

KEEPING COMMUNICATIONS ACCESSIBLE

We regularly review the reading age of our communications from the trustee board to members, aiming to keep this as low as possible. We also use a layered approach, for example:

• An initial ‘push’ communication, like a nudge or postcard about a topic, will be short, providing only the most important high-level details using simple, non-technical language.

• Members can access more detailed information via a link in the nudge to a webpage. From there, they can access booklets, fund factsheets and other guides. These can provide longer, fuller explanations and may contain some more complex pensions or investment terminology.

OUR ESG COMMUNICATIONS

In 2021 the trustee board committed to achieving net-zero greenhouse gas emissions across the scheme’s defined benefit and defined contribution assets by 2050, halving its carbon emissions by 2030 for its equity and corporate bond mandates.

In 2022, the trustee board agreed a three-year ESG communications strategy, including a range of new campaigns to boost member engagement with ESG policies and netzero targets. We have already created a new ESG website page for members (https://futurefocus.staff.hsbc.co.uk/ active-dc/managing-esg-risks) along with an explainer video and annual ESG bulletin with a topical dashboard and newsletter content.

RETIREMENT SUPPORT FOR MEMBERS

Our scheme has a growing population of members aged 50 and over. In 2018, the trustee board appointed a guidance provider to deliver bespoke retirement seminars and follow-up guidance calls for active DC members over age 50. As part of our commitment to continuous improvement, in 2022 we expanded our seminar programme to deferred members and ran a pilot seminar for members under 50. Our retirement

webcast and seminar programme has gone from strength to strength, with very high attendance rates and excellent member feedback including:

Brilliant, I didn’t understand pensions, so this has been fab… Great sessions and nice and lighthearted even when talking about getting older and retiring! Very good session, covered a wide range of subjects and gave lots of things to consider going forward.

SUPPORTING MEMBERS THROUGH THE COST-OFLIVING CRISIS AND MARKET VOLATILITY

During this period of financial difficulty and uncertainty, we believe effective communication is more important than ever. The trustee board has paid particular attention to member behaviours over recent months, monitoring their contributions, opt-outs, investment, and early retirement decision.

We have used these insights to design communications that support and reassure members, including articles in our annual newsletter as well as tailored email nudges and special alerts on our scheme website, futurefocus.

THE HSBC BANK UK PENSION SCHEME’S – DC SECTION PENSION QUALITY MARK AWARD

The HSBC Bank UK Pension Scheme’s – DC Section was first accredited by PQM in 2009, making it one of the longest-standing holders. It holds the PQM Plus standard.

PQM and PQM Plus recognise exceptional DC schemes that go beyond minimum regulatory requirements. They require good contribution levels (a minimum of 12% with at least 6% from the employer, and 15% with at least 10% from the employer for PQM Plus), strong governance and a clear focus on encouraging employees to save for their future. These are all qualities that shine through in the HSBC Bank UK Pension Scheme.

£In 2022, we shortlisted the scheme for the PQM Distinction Award, which recognises the very best in DC scheme design, governance and member outcomes.

Policy progress

As some of my colleagues know (because I keep threatening them with my extensive collection of holiday snaps), I recently returned from a fantastic birdwatching holiday in Costa Rica. The wildlife was stunning and the places were amazing – all exactly as I hoped they would be.

The trip was organised by a British wildlife tour company, and in the latter stages I discovered I was the only one of our group of ten who was actually returning to work on the Monday; everyone else was either long retired or early retired or not really retired but living off their ample savings and investments. Lucky them!

The tour was billed as an opportunity to enjoy Costa Rica’s incredible biodiversity, but I started to feel it was just as much an advertisement for the golden age of British DB pension provision.

It reminded me of the conversation I had a few years ago with a wildlife guide in Romania’s Danube Delta. Without knowing what I did for a living, he told me he was worried about the prospects for UK wildlife tour companies because, as he put it, ‘I’ve heard that your British

pension system isn’t going to be as good in the future.’ He had a point!

You will have spotted by now the link between my holiday reminiscences and the day job – it all comes down to the pensions adequacy challenge that is right at the top of the PLSA Policy team’s to-do list. If people are going to have retirements they can enjoy – whether that’s by travelling the world or whatever they want to do – then we must make sure that the DC generation builds up substantial pension pots and takes good decisions about how to use them.

This is why we were so pleased to see the announcements made by the Pensions Minister, Laura Trott, that the government would back Jonathan Gullis’ Private Member’s Bill which extends automatic enrolment to age 18 and applies it from the first pound of earnings. These are two of the reforms we advocated in our Five Steps to Better Pensions report published at last October’s Annual Conference, so it’s great to see the government endorsing them.

The Minister also got the DWP to publish its own analysis of pensions adequacy against the Pension Commission’s targets and the PLSA’s Retirement Living Standards, almost exactly as we did for our Five Steps project. The findings were pretty similar.

And while I’m reeling off some recent PLSA Policy successes, I should mention that the recent Budget increased the Money Purchase Annual Allowance –something we called for in our preBudget submission.

These wins give me encouragement that the work our Policy team does on our members’ behalf is getting traction. It all contributes in one way or another to tackling the adequacy challenge by helping people to save more and better. That’s the PLSA’s mission after all –to help people get a better income in retirement.

We have recently strengthened our Policy team so they can be an even more effective voice for our members in the corridors of power. I hope that gives us an even better prospect of ensuring people get a retirement they can enjoy –whatever form that takes. If that means the UK can continue sending well-to-do wildlife fans to Costa Rica, Romania or wherever, then even better.

And by the way, I’ve still got those photos - many hundreds in fact, including the one at the top of this page. Hummingbirds, howler monkeys, toucans and tanagers. Any Viewpoint readers who want to see them should just let me know. But be warned, there are quite a lot…

James Walsh reports on team efforts to stop pensions adequacy becoming an endangered species.

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Delivering for workplace pension savers

Since I joined The Pensions Regulator as CEO in early April, we have been actively delivering on our commitments to protect workplace pensions for the benefit of millions of savers.

As our Corporate Plan sets out, we have a full and ambitious agenda. Taking account of the wider pensions ecosystem, we will focus on protecting savers’ money, enhancing the pensions system and, as we look to the future, helping to drive innovation in savers’ interests.

As the pensions landscape continues to shift from defined benefit to defined contribution schemes, so has the risk shifted from employers to savers. As a result, we too at TPR will be focusing on helping to deliver value for those savers.

ENHANCING THE PENSION SYSTEM VALUE FOR MONEY

We expect schemes to provide good value for money – those who cannot do so must improve or leave the market. We have launched a regulatory initiative (RI) to assess whether savers in defined contribution schemes are benefitting from new rules that require trustees to assess whether they are delivering value for their members. TPR expects to report on the progress of the RI, and any action it might take, in the autumn.

We are also continuing our work with the Department for Work and Pensions (DWP) and the Financial Conduct Authority (FCA) to develop a holistic value-for-money framework, to increase transparency and drive up standards and to not simply focus on cost.

PROFESSIONAL TRUSTEESHIP

We are pushing hard for everhigher standards of trusteeship and governance. Through our codes of practice and guidance, we are clear on our expectations for how schemes should be run and we believe there is a strong case for having a trustee who meets professional standards sitting on every pension board. We are looking at how we can develop a framework that would support this. We are also exploring what more we can do to support lay trustees and ensure they have the necessary skills and knowledge needed to carry out their role.

PROTECTING SAVERS’ MONEY DEFINED BENEFIT FUNDING CODE

Securing savers’ money is a key priority for TPR, and we are preparing the new DB Funding Code of Practice. Fundamentally, our aim is to ensure schemes align the level of risk they are taking with the level of support their employer can provide. This should be part of a journey plan to be in a low-risk position by the time they are significantly mature. Importantly, there is room for open schemes to reflect their specific circumstances, including allowing for future accrual.

We will finalise the Code over the coming months to reflect responses to our consultation and the final regulations from the DWP, which are necessary for the Code to come into effect. We expect the regulations and revised Code to come into force at the same time in April 2024 –until then, the existing Code and Guidance remain in place.

FIGHTING SCAMS

Protecting savers from scammers is vital to pensions security – and success relies on effective collaboration with partners in industry, government and law enforcement.

We believe that the industry has a vital part to play, and we will be stepping up our Pledge campaign, urging the industry to significantly increase its reporting of scams to Action Fraud, to provide us and our Pensions Scam Action Group partners with the intelligence we need to fight fraud and criminality.

DRIVING INNOVATION IN SAVERS’ INTERESTS

Embracing innovation to meet pension savers’ needs is a strategic priority for TPR.

In April we authorised the UK’s first CDC scheme – the Royal Mail Collective Pension Plan. We will continue to assess any CDC applications for authorisation, and are working closely with the DWP on plans to extend the CDC framework.

We will also be supporting schemes to prepare for connecting to pensions dashboards.

And looking ahead to the growing challenges of the future, we will work with our partners to deliver good outcomes for savers at decumulation. No doubt the rapid pace of change within the pensions ecosystem will continue and there will be ever greater need to support innovation in the interests of savers.

We look forward to ongoing engagement with the PLSA and other key stakeholders, as we all deliver on our priorities in the interests of workplace pension savers.

Nausicaa Delfas, recently appointed CEO of The Pensions Regulator, sets out her stall.

Tax relief that lasts a lifetime

The March 2023 Budget introduced significant changes to tax relief. Maggie Williams explores the long-term impact

Whenever the Budget approaches, the money pages of daily newspapers and front pages of pensions trade magazines traditionally fill up with speculation about changes to pension tax relief.

In the past, that speculation has generally come to nothing – but April 2023 was different. Chancellor Jeremy Hunt announced changes to the annual, lifetime and money purchase annual allowances, affecting how much savers can put into their pensions, and their options once they have started to take money out. But how much difference will the changes make to the majority of pension savers over time?

WHAT’S CHANGED?

The key changes are:

• Lifetime allowance (LTA) abolished from April 2024, but there will be no lifetime allowance charge for the tax year 2023-2024

• Annual allowance (AA) increased from £40,000pa to £60,000pa

• Money purchase annual allowance increased from £4,000 to £10,000

• 25% tax-free cash frozen at a maximum of £268,275

• Tapered annual allowance trigger increased from £240,000 to £260,000.

The PLSA’s Director of Policy and Advocacy, Nigel Peaple says that the changes are good news. “The pensions tax relief system provides crucial support for people by boosting their savings over the long term. The PLSA has long argued that tax relief is needed to encourage behaviours which help more people achieve an adequate income in retirement.”

Over the long term, Peaple believes that these changes will help to keep employees in the workforce for longer, by giving them extra incentive to save into their pension. “Increasing the LTA, AA and MPAA will encourage older, often highly skilled or experienced workers, to stay in the workforce and provide more flexibility for retirees to re-enter the world of work.”

He adds that it will also enable members to think more widely about pension

savings. “These changes will also allow additional scope for savers to contribute lump sums, perhaps from an inheritance or a redundancy payment, into their pension to meet any shortfalls before they retire.”

WILL THE CHANGES HELP LOWER EARNERS?

While more generous tax relief will be music to the ears of high earners and the businesses who desperately need to retain their skills and experience, how much impact will this have on low and middle earners?

Ian Colvin, Head of LGPS benefit consulting at Hymans Robertson says that changes to the LTA and AA will be important for some LGPS members. “Although the LTA only affects a small number of LGPS members, the nature of the scheme means that senior officers with long service have very little flexibility to amend their pension savings to stay within the limits.”

However, Phil Brown, director of policy for People’s Partnership, says that the changes will have little impact for most people. “The announcements will do

nothing to solve the problem of undersaving in the UK. These changes won’t impact the vast majority of savers and means very little to the millions of people who save through automatic enrolment.”

The proposed changes put forward in Jonathan Gullis MP’s Private Members Bill to extend the scope of auto-enrolment will be more significant for people on lower and average earnings, agrees Peaple. “We believe the Government should go further still by gradually increasing pension contributions in the late 2020s and early 2030s so that they rise from 8% to 12%,

with a larger share of the increases falling on employers.”

Peaple adds that low earners in particular will also be more affected by changes to the State Pension Age than by rethinking tax relief. “Many people, especially those on lower earnings, rely heavily on the State Pension for their retirement income. Increases in the State Pension Age fall disproportionately on people on lower incomes who generally have poorer longevity, so it is positive that the Government did not decide to bring forward the date at which the State Pension Age would rise to 68.”

Abolishing the LTA and extending the AA removes a crucial barrier to longer-term pension savings for higher and some middle-income earners. And, increasing the MPAA will encourage people already accessing their pensions to continue to save. But this is only part of the story. To help everyone save for an adequate pension requires wider reform and joined-up thinking across all aspects of retirement savings.

NEW TAX RULES: FIVE TIPS FOR PENSION SCHEMES

1. Encourage members to check payslips, pension statements or online pension accounts. This will help them understand how much they’re putting into their pension at the moment. High earners and members who were close to the old annual allowance limit might now be able to put in more money. Members who are already taking their pension but also saving into another pension elsewhere might also be able to put more money in with a more generous MPAA.

2. Talk to your administrator. Although no-one will have to pay tax on pensions over the LTA, it won’t be abolished completely until the 2024/2025 tax year, so administrators will still need to carry out LTA checks until then.

3. Help members think about what they’re aiming for. The PLSA’s Retirement Living Standards help members picture what their lives might be like once they stop working, and how much that life could cost them. Support members so that they know how much they’re putting into their pensions, what it’s likely to be worth when they retire, and whether they’re on track for the lifestyle that they want.

4. Give easy access to guidance. Under new guidance introduced last year, DC schemes’ trustees must ‘nudge’ members (or beneficiaries) to book a Pension Wise appointment or actively opt out of doing so, before they access their pension savings. This can help members understand the new allowances and think about the impact they might have on how and when they access their pot.

5. Check communications. Make sure any pensions booklets, websites and other communication channels take account of the new allowances and the freeze on the tax-free lump sum.

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TRUSTEE TRAINING PROGRAMME

Our trusteeship courses help trustees of all levels to understand the role and responsibilities and the issues you will face. We’ll improve attendees’ knowledge and impact and make you the best trustees you can be.

PART 1: THE THEORY

14 September

Our expert trainers take trustees with less than 12 months’ experience, including no experience at all, through how pension schemes work, what is expected of them and how to apply good scheme governance.

PART 2: THE PRACTICE

31 October

With support and guidance from independent experts, trustees with some experience will take part in boardroom simulations to learn how to approach the issues you will face in your role.

PART 3: THE EXPERT

22 November

This course is aimed at those who have been in their trustee role for two to three years, who are familiar with the basic principles of trusteeship and accustomed to attending trustee meetings - but who are keen to hone their skills and improve their effectiveness as a trustee.

Find out more: www.plsa.co.uk/Events