Editorial: Another edition of Pensions Expert hit the shelves last week, and at the time of writing my last editorial there looked to be a strong chance the UK would no longer be a part of the EU by the time this month’s edition rolled off the press. What a difference a month makes.
Instead, EU leaders have agreed to grant Theresa May a six-month extension to the Article 50 process, with October 31 the new deadline for a deal to be struck over the country’s departure.
Much as with the long-term direction of investment markets, anyone who predicts what will happen next with any degree of certainty can probably be safely ignored. Brexit, no Brexit; deal, no deal; general election or no – everything is up in the air.
Much like an insurance policy, trustees are unlikely to see the benefit of it, but it can give them peace of mind, and most importantly will reassure members that they are safe in the event of insolvency
If the UK eventually turns its back on the Brexit project, it might be tempting to reflect that the reams of policy documents planning for a no-deal scenario have been an enormous waste of time and money – £4.2bn to be exact, enough to clear the deficit of the UK’s largest private sector defined benefit scheme.
But of course, the real value of contingency planning lies in its downside protection. This sum would be a drop in the ocean compared with the cost to the UK economy of crashing out of the EU without a deal and with no preparation for doing so.
Time for trustees to address possibility of failure
The same lesson can undoubtedly be learnt in pensions. I am therefore delighted that our cover story this month can bring you exclusive details of guidance, issued by the Pension Protection Fund, on the processes DB trustees can put in place to protect members if the worst comes to pass and their sponsor falls over.
Much like an insurance policy, trustees are unlikely to see the benefit of it, but it can give them peace of mind, and most importantly will reassure members that they are safe in the event of insolvency. As Dalriada’s Tom Lukic put it to me: “The best contingency plan is the one you never have to use.”
If several of our recent stories have an air of gloom about them – Josephine Cumbo’s scathing review of the annual allowance taper and the sad case of a charity crushed by DB rules spring to mind – there are reasons to be cheerful.
Shell, John Laing and South Yorkshire are all reaping the rewards of successful DB strategy – with the latter investing the proceeds in improving Sheffield city centre.
DC gets a much-needed rethink
The defined contribution sector offers a similarly sunny outlook. Schemes like Associated British Foods are pushing down fees and widening their portfolios, while thought leadership has turned to how default funds can better address the retirement needs of savers.
This rethinking of the DC status quo centres around assessing value for money not solely via performance figures, but by how well prepared the collaboration of schemes and employers leaves members.
Minimum contributions under auto-enrolment rose to 8 per cent combined this month. However, it will not be news to readers that this is not enough, even if portfolios embrace illiquidity premiums and insulate themselves from the fat-tail risks posed by environmental, social and governance factors. Employers will have to raise their game, and it is a positive development that costs are now viewed in this wider context.
Investment returns are of no use if they do not help members achieve plans in retirement – and rather fittingly it is therefore by being honest about the possibility for failure that the sector can move forwards.
