Pensions World

“What’s new in the world of pensions law?” asks James Thomas. The answer, as ever, is “everything”

In the ten years that I have been conducting the annual Pensions World survey of pensions lawyers, the one constant has been that of constant change. And this year is no different; indeed, the advent of the global downturn has perhaps compounded the rate of change, resulting – according to the lawyers surveyed – in an acceleration of scheme closures and an increase in pension disputes.

As if employer sponsored schemes were not under enough pressure, the credit crunch has exacerbated their woes, according to Anthony Arter, partner and head of pensions at Eversheds: “Corporate sponsors have had to address issues relating to their ongoing businesses when credit and banking facilities are at an all time low,” he says. “Meanwhile, the difficult market conditions have resulted, in many cases, in increased deficits to defined benefit (DB) schemes. The challenge for corporate sponsors continues to be the need to fund scheme deficits at a time when there is often reduced cash flow in the business generally.”

TABLE 1 - Top performers

TABLE 2 - Fees

TABLE 3 - Pensions lawyers - their practices and clients

Indeed, these tightened market conditions have increased the threat of “moral hazard” and the trustee role itself has become more critical than ever. As Mr Arter continues: “The problem for trustees is to manage a delicate balancing act in relation to scheme funding and deficits, but trustees should not be looking to accelerate scheme funding to such an extent that the viability of the company is jeopardised.

Investment strategy reviews have increasingly taken place as trustees have sought to react to the huge volatility in the equity markets.”
When it comes to such investment issues, lawyers have noticed an increasing sophistication among trustees and this has both changed the nature of the legal advice they require and the decision making capability of trustees themselves.

As David Wright, head of pensions and benefits at DLA Piper, reports: “There is an increasing awareness of alternative asset classes leading to the need for trustees to take advice from those expert in such matters as swaps contracts, hedge fund investments and general derisking/longevity mitigation strategies.”

Meanwhile, Däna Burstow, partner, Allen & Overy, says that the investment sophistication and commercial understanding now expected of trustees has created a “different feel” to negotiations: “We really are seeing trustees at the table earlier and louder than ever before.”

Heightened sensitivity

As the downturn has increased pension deficits, pension schemes have become more of a business risk issue than an employee benefits one and, with sponsors sensitive to the volatility of pensions liabilities, the employer exodus from DB schemes has continued to snowball.
Allen & Overy, like most firms surveyed, has noted an increase in work around exit strategies and a greater focus on investment plans to align employer and scheme risk.

Mr Arter concurs with that view: “Sponsors have sought to keep scheme costs under control by looking at liability reduction exercises including incentivised transfers out and/or scheme design (anything from closing to new members to closure to future accruals).”

However, such strategies do not mean an end to the need for legal advice. While the move to defined contribution (DC) provision, through contract based rather than trust based arrangements, might avoid the cost and bureaucracy associated with a trustee board, François Barker, Partner, Hammonds, notes that “many employers find that a ‘pure’ contract-based arrangement leaves their employees feeling abandoned and cast adrift”.

“We are seeing a move towards using pensions management or consultative committees in relation to contract-based arrangements,” he says. “These committees can look quite similar to, and replicate some of the functions of, traditional trustee boards and can require some of the same legal input (particularly on exercising discretions and investment strategy).”

Meanwhile, legacy DB schemes still require a substantial amount of legal support. Indeed, the management of DB liabilities is a timely issue as many lawyers predict that the trend towards buyouts of the past two years will slow and scheme sponsors may increasingly look to alternative arrangements.

“The ‘second wave’ of scheme closures is now upon us, with many employers considering stopping future accrual for future members,” says Mayer Brown’s head of pensions, Anna Rogers. “The UK occupational pensions market is entering a new phase of maturity and the end of the road is in sight. But pensions is a long term business and there will be legacy issues for decades to come. Despite the increased transfer of risk to the insurance sector, there is not capacity in the insurance market to absorb the bulk of the UK’s DB promises.”

New awareness

While some respondents report that the appetite for buyouts has continued to grow in 2009, the consensus is that it is already diminishing. Kris Weber, head of pensions at Charles Russell, is of the former view: “Schemes are now properly preparing for the ‘end game’,” he says. “Quality and security of pension provision seem to have increased, which can only be good. So, too, have expectations, and heaven forbid the prospect of an insurer failing in the future. Several of our clients have taken, or are looking to take, advantage of favourable market terms at present. The extent to which they recognise the need to have the scheme’s data/records and benefit structure in scrupulous order varies widely, however.”

For Eversheds, the methods for managing scheme liabilities have changed over the past 12 months. “We have seen a reduction in the number of buyout exercises – whether buying out all scheme liabilities or a tranche of those liabilities – and indeed at least one buyout provider has said that it will not be writing any new business at present,” says Mr Arter. “At the same time, schemes have started increasingly to explore buyin options in order to reduce volatility as well as other risk reduction exercises.”

On the other hand, Lovells reports a noticeable dropping off of interest in both buyouts and buyins, accompanied, however, by a new awareness of longevity swaps. As well as current pricing and market capacity issues, security is perhaps an added factor in this declining interest, as Norman Russell, head of pensions, Berwin Leighton Paisner, points out: “Just how do you measure, today, how strong a buyout provider will be in 80 years’ time?”

Destabilising influence

Indeed, concerns over the security of the buyout market have in recent times resulted in increased powers for – and influence of – the Pensions Regulator (TPR). In the view of some, these powers have gone too far and have become a destabilising influence. “There was a need to have a proper regulatory framework governing occupational pensions provision,” says François Barker, “but there is now a risk that the pendulum has swung too far in favour of regulatory/trustee powers at the expense of corporate flexibility and health. In particular, we are concerned by the strengthening of the statutory regime governing the issue of contribution notices; the Regulator’s new powers to reset valuation assumptions where these are considered to be insufficiently prudent; and the Regulator’s interference in DC trust schemes. High standards of governance are desirable but over-regulation is unnecessary.”

For Ms Burstow the powers are wide on the face of the law, but much depends how they are exercised. “I was rather alarmed by rumours the Regulator was going to be pressurised into being much more aggressive and overtly wielding its powers,” she says, “but thankfully that doesn’t seem to be the case.”

Jane Marshall of Macfarlanes is of the opposite view. “We no longer really have a ‘scheme specific’ regime, but one where the judgment of trustees robustly engaging with their employer is often superseded or unduly influenced by the Regulator’s judgment,” she says.

“Statements from the Regulator are sufficiently vague to create uncertainty and employers need regulation to be clearer over what is reasonably to be expected of them. Public policy issues surrounding the balancing of the interests of pension members with other company stakeholders, employees and investors have not been clearly articulated and the government should be clearer about where it considers the proper balance should lie, not hide behind the Regulator.”

All change

And speaking of the government, as in previous years, the survey respondents were unanimous in their condemnation of the current administration’s understanding of, and contribution to, pensions legislation.

The reduction of tax relief on pensions contributions for high earners, introduced in the Budget, is a prime example of this.

“The simplification exercise recently showed what could be done by thoughtful lawmakers and then the government has to ride roughshod over that with its anti-forestalling measures – ill thought through, unfair, complicated, with temporary mountains of regulations – a ridiculous, political, short-sighted move,” argues Ms Burstow.

Many are concerned that the reduction of tax relief will have a knock-on effect on overall provision, as senior management are affected by the change opt out of their company’s scheme. Having done so, these business leaders and decision makers may feel more inclined towards closing schemes to future accrual.

François Barker’s frustration with the government’s constant U-turns is evident. “The 2009 Finance Act cuts right across the principles set out in the Finance Act 2004 on pensions,” he says, “only three years after clients spent considerable time and money re-engineering their schemes for what was expected to be a new, long-term regime. Such a precedent has made it virtually impossible for employers and trustees to plan for pensions provision over the medium to long term.”

If opinion polls are to be believed, it seems increasingly likely that the next government may be a Conservative one. It is a prospect which has received mixed reviews, although the Conservatives’ stated commitment to deregulation, the abolition of compulsory annuitisation at 75 and an investigation into the costs of Personal Accounts and public sector pensions have all been welcomed. Mayer Brown, for example, applauds the Conservatives’ suggestion to phase out means testing of pension benefits, but believes that wholesale change is unlikely and that, given the radical changes over the last few years and those that are already in the pipeline, a period of stability is probably a good thing.

In the meantime, however, employers and lawyers themselves will have enough to keep them busy ahead of the general election in 2010, with the 2012 deadline for Personal Accounts looming and, according to most respondents to our survey, the fact that most employers are not yet prepared for the changes that lie ahead.

If 2009 has been a year of change, so too will be 2010.

James Thomas is a financial journalist; jamesthomasworks@yahoo.co.uk