What’s next for the pensions industry?

Sep 30, 2020

2020 has been a year of expected and unexpected change for the pensions industry, but even more change lies ahead, argues Elma Fox.

When looking forward to 2020, the pension industry anticipated a year of change and development. We have certainly experienced much change, unfortunately, much of it from unanticipated events. We can learn a lot from our response to these events, which will inform how we deal with future changes and developments.

When looking forward, we expected change to arise from the usual sources – legislative changes mainly from the EU, and both domestic and international political developments. Anticipated changes included:

  • The transposition of the IORP II Directive into Irish law;
  • The implementation of the European Union Anti-Money Laundering Beneficial Ownership of Trust Regulations 2019 requirement for a beneficial ownership register for pension trusts;
  • Clarity on the application of the European Union Supplementary Pension Rights (Outgoing Workers) Regulations 2019;
  • European Central Bank Statistical Data Reporting requirements to the Central Bank of Ireland;
  • Guidance on, and increased use of, master trusts;
  • Preparations for the increase in the state pensions age to 67 in January 2021;
  • Further consultation on, and development of, the structure and system for auto-enrolment pensions for roll-out in 2022;
  • The impact of a new government with potentially different pensions objectives, following a general election;
  • The ongoing impact and fallout from Brexit; and
  • Potential market volatility during the US presidential election campaign.

These issues have, and will continue to have, an impact on the development and future of the industry. This will be covered in more detail later in this article.

Amid this hectic period of change and development for the pensions industry came the global COVID-19 pandemic. The first restrictions and lockdowns in March coincided with a significant drop in investment markets. The pensions industry, along with every other industry, faced challenges and circumstances it hadn’t dealt with before. The immediate impact and response fell mainly into two areas:

  1. Providing essential services while facilitating work from home practices across the board. In normal circumstances, such a change in working arrangements would take months of planning and implementation; and
  2. Ensuring that benefits continued to be paid and assets kept secure while ensuring contributions could still be paid and invested.

Immediate considerations

Once the immediate actions were taken to ensure that services could be provided from homes around the country, several items had to be considered for the short- to medium-term operation of pension schemes and the provision of benefits. They included:

  • The Pensions Authority’s announcement on 27 March and its subsequent update on 24 April. These announcements covered several topics, such as:
  • o The prioritisation of pension and other benefits payments, and the collection of contributions;
  • o Making immediate investment decisions, which was cautioned against unless necessary;
  • o Dealing with requests to cease or suspend contributions, obligations to pay what has been deducted, checking contracts of employment, scheme rules (and, in some cases, legislative requirements), funding commitments for defined benefit schemes, and interaction with the Temporary Wage Subsidy Scheme (TWSS); and
  • o Obligations on disclosure requirements (annual reports, member benefits statements, communicating changes etc.)
  • The Emergency Measures Act, which didn’t mention pensions. The TWSS payment could not be reduced, so it was assumed pension contributions could not be deducted from it;
  • Business continuity plans for service providers, employers, and pension schemes had been implemented and needed to be reviewed, updated and, in some cases, documented;
  • The ability to hold meetings, both in terms of hardware/software and the power or authority to hold them. Meetings had to be held to deal with the usual cycle of trustee meetings, which covered administration, service, compliance, and investment. COVID-19 response meetings were also necessary;
  • Employers’ and members’ current circumstances in terms of employment, remuneration, and contributions;
  • Notwithstanding the Pensions Authority’s caution against making immediate investment decisions, trustees needed to consider the implications of the fall and subsequent rebound in asset values, the impact on their investment strategy, and the performance of the funds against their benchmarks and expectations. Were changes required? Would the funding of the scheme be affected? Was there a need to communicate with the employer and members? The results of Mason Hayes Curran (MHC) and Irish Institute of Pensions Management (IIPM) survey found that 71% of schemes had not adjusted their investment strategy as a result of the pandemic;
  • The ability to maintain risk benefits for members and employers where employment or contributions are temporarily suspended. Insurance companies were supportive in providing cover in most cases; and
  • The information to share with members to reassure and assist them and how to issue those communications.

COVID-19’s impact on pensions

There are also longer-term impacts and associated economic and employment effects to consider, arising from the COVID-19 pandemic. They include the effect on valuations of changing and volatile liability and assets values, and the potential for lower contributions (e.g. the suspension of employer and employee contributions, reduced salaries, and/or reduced contribution rates). Other potential impacts include changed membership (e.g. temporary or permanent layoffs, reduced working hours, phased returns to work) or changed employer status, which may impact on the employer covenant, the ability to pay, and on benefits and pension budgets.

The general outlook for pensions provision

The outlook for the pensions industry, taking into account the changes anticipated for 2020 but filtered through a COVID-19 lens, leads to the following conclusions:

  • There will be an increased focus on governance and risk management. The crisis may highlight the strengths and weaknesses of the current system;
  • Timelines for IORP II implementation will be needed, given the number of other challenges in play;
  • The changed economic outlook may impact the planned timelines for auto-enrolment. The results of the MHC/IIPM survey found that 66% of respondents expect the roll-out to be delayed due to the current crisis;
  • Concerning the state pension age, employers and employees need to know what they are planning for. The current Government deferred the planned change from age 66 to 67 pending a report on the issue by a Commission on Pensions, which will be established to examine various issues related to the sustainability of, and eligibility for, the State pension; and
  • In terms of ECB/EIOPA reporting, one wonders if outputs or feedback will be provided to the Central Bank, when we might expect clarity on EIOPA reporting requirements from the Pensions Authority, and whether the reporting requirements will be coordinated.

The effect of 2020’s expected and unexpected changes

The impact of both the expected and unexpected changes on the pensions industry – and the broader political, legal, and economic environment – places enormous demands on those involved in providing pensions to respond and adapt to changed outlooks for schemes, sponsors and members. Professionals should also expect increased governance and compliance standards, increased reporting requirements, and the need for new functions, including internal audit and risk management.

The increasing professionalism of trustees to meet these growing requirements and expectations will also be a point of sharp focus, resulting in a need for upskilling, training, and qualifications for new roles and requirements – not to mention knock-on implications for service providers.

The pensions industry has proven that it is resilient and capable of adapting to the changes and challenges presented by COVID-19. We must continue to learn, develop and innovate to ensure that we are ready to deal with the immediate and longer-term challenges and can continue to provide stable, reliable, and sustainable pensions for members.

Elma Fox is President of the Irish Institute of Pensions Management.