Pensions World

Will 2012 see an Olympic leap forward in pensions provision? Editor, Stephanie Hawthorne asks the great and the good for their predictions

Threats and opportunities

John Ball, head of DB pensions consulting at Towers Watson

Between July and November 2011, there were five occasions when FTSE 100 companies’ combined pension deficits changed by £20bn or more in less than a fortnight. Few defined benefit schemes will  enter 2012 expecting a smooth ride.

Market volatility threatens the balance sheets of companies whose pension schemes are large relative to their business. However, it also presents short lived opportunities which  more schemes will want to seize. Most are resigned to the fact that they will not be able to remove all risks any time soon, but being able to act during the brief period when the price looks right can shorten these journeys.

Where deficit recovery plans have been blown off course, new plans will have to be agreed. Expect closer scrutiny of valuation assumptions and of what employers can afford.

Longevity goes global

David Blake, director, Pensions Institute, Cass Business School

The first international longevity risk transfers took place in 2011 when Goldman Sachs subsidiaries Rothesay Life and Paternoster reinsured over £500m of longevity risk with the US based Prudential Retirement.

At the end of 2010, the first buyin deal outside the UK took place between the Dutch food manufacturer Hero and the Dutch insurer Aegon. So the longevity market which began in the UK in 2006 has now gone global. Many more international deals can be expected in 2012.

Back home, total transfers in the form of buyins, buyouts and longevity swaps exceeded £9bn in 2011, with longevity swaps taking a bigger share than ever before at around one third of the total. 2012 is expected to see even more deals completed, mainly in the form of buyins and longevity swaps.

A dead cert

John Lawson, head of pensions policy, Standard Life

Is 2012 the most predictable year in pensions history? Auto-enrolment will go ahead in 2012. In fact, the first employee will probably have been enrolled before the Olympics opens at the end of July.
Annuity rates for men and women will be harmonised in December 2012, following a 2011 European Court of Justice judgment.

Another dead cert is that the lifetime allowance will fall to £1.5m in April 2012. Fixed protection provides a lifetime allowance of £1.8m, but must be claimed before the end of the tax year. In some cases, it is possible to continue DB accrual without losing fixed protection.

Among less certain measures, cash incentives may be banned as part of the government’s review of enhanced transfer value exercises. And, the Department for Work and Pensions may announce the end of short service refunds.

Huge year for pensions

Ros Altmann, director general, Saga

2012 is likely to be a big year for pensions. We will presumably have a White Paper on radical state pension reform, with the government’s proposals for a flat rate £140 a week state pension being unveiled. And there is a revolution starting for private pensions, too. As more final salary schemes close, auto-enrolment will begin and there will be far more talk about the need to save for retirement.

The government expects employers to help promote the value of pension saving and Nest will face competition from rivals such as ATP and B&CE. There may well be more annuity reform coming, especially if rates keep falling as they have during 2011. Another round of quantitative easing is a possibility and will inflict significant further damage on pensions. Inflation may ease a little next year, but not enough to take the pressure off pension schemes.

Dire realities

Stuart Southall, chairman, Association of Consulting Actuaries

Having in January 2011 predicted an annus mirabilis and then witnessed an annus horribilis, I simply cannot be as optimistic about 2012.

While all but taxi drivers might enjoy some short term diversion from the Olympics, the economic realities for the UK, Europe and maybe the West generally are set to be dire. Well informed investors will increasingly turn to the emerging markets as, indeed, may a fair proportion of our financial sector and those serially maligned people who work in it.

A shrinking tax base and public expenditure which cannot be reined in will continue to paralyse the country. At sea on the margins of Europe we will have to adjust to life as a small over-crowded island with an interesting history (and pensions past), but a bleaker future (with poor pensions).

Simmering tensions

Ian Pittaway, senior partner, Sackers

How employers respond to auto-enrolment will dominate next year. Companies will be forced to look again at their pension provision – often having to decide how they strike the right balance between defined benefit members still accruing pension benefits, their defined contribution members generally on lesser benefits and, in some cases, a large group of members sitting completely outside the company’s arrangements.

The auto-enrolment trigger will be a catalyst for a thorough review and in some cases radical action to harmonise.

The tensions between employers and trustees around the funding of DB schemes will continue to simmer, especially given current economic conditions worsening deficits further. Expect more deficit reduction exercises like enhanced transfer values (ETVs exercises and price increase exchanges (PIE) – and pressure on the Pensions Regulator to either support or outlaw them.

Sitting on the fence helps no-one.

The pensions Olympics

Joanne Segars, chief executive, NAPF 

2012 is going be the year of pensions.

Auto-enrolment  will be a landmark shift that makes pensions saving the norm. But, with a flatlining economy, we may see higher than anticipated opt out rates.

The reforms will also signal a shake up in the DC market, where new, large scale providers have arrived. Questions about DC will rightly fix a spotlight on fees and charges and we are working on a new industry code of practice.

We are worried by developments coming from Europe, with a decision on Solvency II expected towards the second part of the year, which could do major damage to UK defined benefit pensions while also undermining the investment and job creation we need to get the EU economy going again.
The government is also coming round to state pension reform, where a simpler and more generous single-tier “foundation” pension is a must.

The Olympic athletes will not be the only ones breaking a sweat. For pensions insiders, it is going to be another busy year.

The themes remain the same

Alan Brown, group chief investment officer, Schroders

Investors should expect the investment landscape in 2012 to look broadly familiar. The greatest uncertainty surrounds the future of the euro and the eurozone. There is no guarantee the New Year will bring resolution to that story. The possible break up of the single European currency looks increasingly likely.

The all-important question is whether any restructuring is orderly or disorderly.

German reluctance to see the European Central Bank monetising debt is risking the development of a full blown credit crunch. A recession in the eurozone is already highly likely and the only real question is how deep will it be.

As key government bonds have become more expensive and equity markets have continued to fall, the relative attractions of equities with good dividend cover such as M&S have grown.

Politics and economics are meeting head to head. One can only hope that our politicians will choose the least bad outcome before it is too late.

The long haul

Kevin LeGrand, president, Society of Pension Consultants

Our hard working Pensions Minister should deliver a momentous year in 2012. We are promised two major initiatives, in the form of overdue proposals for reinvigorating occupational pension provision and proposals for the new simplified state pension scheme; in addition auto-enrolment is scheduled to commence. Together they have the potential to transform pensions provision.

Despite the heavy work rate, I applaud the desire to tackle the major impediments to a successful pensions system – there is still much to be done. In particular I await the “reinvigoration” proposals. Achieving a successful outcome here is the Holy Grail, but it will not come easily. The proposals will need to reflect both the vital importance of rebuilding confidence and the long term nature of the task; this is still just the beginning.

A big step up

Tim Jones, chief executive, Nest Corporation

Now Nest is live and working with more than 100 employers, next year will see the scheme taking on increasing volumes of employers of all sizes and sectors.

We will continue to refine our processes for employers and members to ensure we are easy to use, no matter which way an employer decides to use the scheme, and to provide a straightforward and empowering experience for all our members.

Auto-enrolment in the round will make its way into consumer consciousness for the first time. Firms and their advisers will also have a greater awareness as they look ahead to the next tranches of staging.

It is a huge year for pensions and, while it may not have the immediate feelgood factor of London 2012, auto-enrolment is an Olympian leap forward for the retirement aspirations of millions.

Change is the only constant

Hugh Cutler, head of distribution, LGIM

Lately, uncertainly has become the only thing we can count on. Unfortunately economic concerns and market volatility are unlikely to abate in 2012. At the same time, industry and regulatory developments (such as Solvency II) and the growth of fiduciary management, which is changing the traditional roles of consultants and investment managers, continue to redefine the pension environment.

As a result, investors continue to seek greater product sophistication and holistic risk management solutions. For defined benefit schemes, the headwinds of low yields, inflationary fears and underfunding should keep most plans focused on de-risking. To achieve this, schemes are likely to continue combining a variety of tools to manage asset price volatility, hedge their liabilities and focus on establishing the right defined contribution solutions for their members.