Will COVID-19 usher in a 'new normal' in pensions? Or will it accelerate trends that were already evident before the crisis?
Some sectors and industries will see entirely new ways of working. This is unlikely to apply in pensions. Instead, our view is that the COVID-19 crisis will lead to an 'accelerated normal'.
In other words, COVID-19 will not be midwife for the birth of new trends in the world of pensions. Instead, it will be a catalyst accelerating trends that were already in evidence before the crisis.
Trustees should consider strategically how their scheme is set up to respond to the acceleration of these trends. There will be challenges and opportunities. We recommend that a plan is put in place to strengthen the scheme's response to these trends.
Key action points for trustees
1. Review your scheme against the key industry trends
Before this year was hijacked by COVID-19, a number of emerging trends were evident in the UK's pensions industry. In our view, these trends will be accelerated by coronavirus and the resulting social and economic changes. These trends include reliance on technology, consolidation, flexible governance, real-time information and data, value for money, environmental, social and governance (ESG) investment, and an increasing focus on long-term objectives and risk planning. Trustees should review the operation of their scheme against these key industry trends.
2. Consider altering your response to the accelerating trends
Trustee boards should set aside time to consider strategically whether there is a need to adjust how the scheme operates, implement short term plans and make amendments to medium and long term plans. This will help to put the scheme in a stronger position to respond positively to the challenges and opportunities that will result from the post-COVID-19 acceleration of the key trends identified in this Insight.
3. Agree an action plan to get ahead
Once the Trustee board has held a strategic session to consider the accelerating trends and the scheme's position relative to them, an action plan should be drawn up with appropriate timelines to ensure steps are taken to implement any changes considered beneficial.
Our lives, personally and professionally, have been turned upside down by COVID-19. We are still within the crisis management phase. It is not yet clear when and how life will settle down in a post-COVID-19 world.
There are already clear signs that things in the broader economy and society will be different after the virus has been controlled compared to how they were before.
A phrase that is so overly used that it has become a cliché is that we are moving into a "new normal". However, in the world of pensions, rather than creating a completely new set of trends, the lasting impact from COVID-19 will be the acceleration of trends which were already in existence.
In particular, we think that we will see the acceleration of the following key trends:
- reliance on technology;
- flexible governance;
- value for money;
- real-time information and data; and
- long-term objectives and risk management.
Trustees, in our view, need to spend time considering strategically how their scheme is positioned relative to these trends and consider whether changes need to be made to be able to respond better to the challenges and opportunities that these accelerating trends present.
Responding to the trends accelerated by COVID-19
Rather than creating a "new normal", our view is that there will be more nuanced implications for the pensions industry following the containment of COVID-19. This will see an "accelerated normal" COVID-19 with the speeding up of key trends that were already in motion in the pensions industry before the crisis. Trustees who want to take a strategic view should reflect on these trends and consider how their schemes are positioned against them.
We've put together a list of these trends and it is striking how interrelated and co-dependent these developments are.
Reliance on technology
The past decade has seen dramatic, technology-led changes in all aspects of life. Digitalisation has become a key driver in many industries and pensions is no exception. With many people working from home, COVID-19 has literally brought home technological changes that we've seen in offices.
Trustees have generally been pleasantly surprised by the ability of technology to 'keep the show on the road' during lockdown. Administrators have continued to operate well, trustees have continued to be able to meet, and advisers' business continuity plans have been robust. Technology has come through the test and, as a result, we can expect to see an acceleration of trustees' reliance on it.
Trustee meetings delivered by video conference and online document storage are just the start of this process. Two developments are converging that will reshape the pensions landscape over the coming decade.
The first is financial technology (FinTech). FinTech has already revolutionised banking and its backers are now looking over to the pensions market. The second is the government's pensions dashboards policy. Pensions dashboards will require the digitisation and standardisation of pension records. This could be the catalyst for innovative data-driven solutions to the perennial problems of people not saving enough for retirement and broader member engagement (see the section headed Real-time information and data below).
Going even further, artificial intelligence (AI) was already being deployed in the pensions industry before COVID-19. Whether powering robo-advice, producing tailored member communications and even providing initial responses to member queries, AI is a presence that will only develop and spread.
With growing reliance on technology comes increasing dangers: scams, the risk to service delivery of electricity or internet supply failures, cyber-crime, data protection, fraud, and so on. Trustees have become reliant on technology as never before. This is unlikely to reduce materially in a post-lockdown world. That provides great opportunities for the pensions industry, but, in order to use technology responsibly, the risks associated with it need to be higher up the agenda.
Before COVID-19, the pensions industry was taking steps towards consolidation. This was evident from:
- the move to a smaller group of larger defined contribution (DC) master trusts;
- the rise of fiduciary managers;
- the trend towards professional trustees (including in a sole trustee role);
- buy-ins and buy-outs;
- schemes falling into the Pension Protection Fund (PPF); and
- the emergence of new defined benefit (DB) consolidators.
The search for economies of scale to drive down cost and increase value for money will only be accelerated by the COVID-19 crisis. We expect to see greater interest in fiduciary management as trustees reflect on how their investment strategies have coped with this crisis and the financial one of 2008.
We anticipate an acceleration of trustee boards appointing professional trustees and situations where those professionals act alone as the sole trustee when companies and boards reflect on the level of risk involved in running schemes and appreciate the need for experience and an ability to move swiftly.
End game answers will be higher on the agenda too, so risk transfer deals will continue to grow and the new DB consolidators will get off the ground. Corporate groups with a number of schemes will look to manage operational costs by using consolidation whether by appointing common advisers, common trustee boards, or merger.
Trustee boards had already been developing greater flexibility of operation before the crisis, whether through amending governance documents to allow for more flexible meetings or by way of better use of sub-committees. The COVID-19 experience will accelerate this trend.
While an appreciation of the benefits of face-to-face meetings for certain discussions will be evident, it will also be acknowledged that efficient meetings can take place remotely, saving costs and travel time and being 'greener' as a result. "What is the best way to hold this particular meeting?" will be a common and useful question.
Key-man risk is another thing that schemes should reflect on after this crisis, at board level but also at executive and adviser level. And the use of effective delegation to sub-committees, individuals and external sources should be reviewed too as the COVID-19 crisis shows the importance of properly governed delegation.
Overall, embracing flexible governance with appropriate safeguards in place will enable boards to act more effectively, focusing high-value strategic decision making at the board level while allowing faster operational decisions and actions to be taken away from the board table.
Value for money
Trustees are increasingly focusing on value for money in the services they buy. COVID-19's impact on the economy will accelerate this trend. Ultimately, it is members or sponsoring employers who are bearing these costs. It is incumbent upon trustees to seek to manage value for money carefully. As is clear in the context of DC, value for money does not equate to the cheapest: it must be considered in the round and service providers need to be assessed by looking at the value they bring in all respects, which will include historic knowledge, strength of personal relationships, commerciality, pragmatism, and so on.
Pensions law, as an example, is a complex area. Trustees need to be sure that they have a team on their side that can:
- deliver deep, specialist expertise on complicated projects when they arrive (e.g. risk transfer, pensions litigation, corporate activity involving the sponsor, benefit changes); but, at the same time
- deliver efficiencies and economies of scale on day-to-day activities.
We expect to see trustees engaging in an increasingly sophisticated assessment of the value for money provided by all service providers, weighing up cost and the various elements of quality.
Environmental, Social and Governance investing (ESG)
Before COVID-19 hit, ESG was the hot topic for pension schemes. Increased regulation, and pressure on The Pensions Regulator to do more in this area, meant that ESG was rising up the agenda fast for all trustee boards (see our insight 'ESG has moved up the pension trustee agenda - are you ready?')
Clear skies over some of the world's smoggiest cities, the stark drop in pollution levels, and wild animals roaming unfamiliar urban streets has linked COVID-19 with the impact humans have on the environment. Some argue that a deep recession risks ESG dropping down the investment agenda. We think it more likely that it will achieve the opposite. There is no let-up in government pressure on schemes develop their approach to ESG from simple box-ticking compliance to more proactive engagement.
Turning new legal duties on trustees into pragmatic action won't be easy and will need sensible guidance to be effective. This is particularly the case for schemes where pooled fund investment is the norm. However, the trend of bringing ESG within the core investment arena rather than as a separate field will accelerate.
Trustees should receive training on their legal duties in respect of ESG. From that base of greater understanding, they should develop their statement of investment principles from the current non-comital comments into sensible, proportionate and practical actions. To help them with this, access to good quality data will be vital, a point which leads us neatly to the next trend.
Real-time information and data
Because of advances in, and the expansion of, technology, the availability of data and information has grown hugely over the years. Before COVID-19, this was a developing trend within the pensions industry. Examples include:
- a greater amount of investment data presented to trustees;
- dashboards enabling trustees to monitor funding levels (including to track against buy-in quotes); and
- phone apps for members to follow and, in some cases, manage their pension accounts.
In the wake of COVID-19, we anticipate that trustee boards will either:
- acknowledge how useful their real-time data feeds have been to them; or
- recognise that the information they received was simply not been fast or helpful enough to help them react as effectively as possible.
Either way, this will lead many trustees to appreciate that, when a crisis hits, having quick access to understandable data is vital to effective decision making. This doesn't mean that trustees need to be led by the data or take immediate, knee-jerk reactions. But having a deeper understanding of the current position provides trustees with more confidence to take better decisions.
We think that, as result, trustees are likely see the benefits of more, good quality, real-time data for life after lockdown. Whether this is to help with ESG analysis, to make smart investment change decisions, to develop risk mitigation strategies or simply as part of getting ready to comply with legal duties in respect of pensions dashboards.
Again, with these positives comes a stark warning. Trustee boards will need to beware of the risks of becoming slaves to data-driven actions and ensure sensible controls and governance are wrapped around it. For example, algorithms can be extremely useful in analysing and taking actions based on data. But those in charge need to understand how they work.
A useful illustration of the risks comes from Germany, where the Federal Cartel Office fined an airline whose prices jumped when a rival went out of business. The airline tried to defend itself by arguing that its algorithm had increased prices automatically as demand increased. In a warning that could equally apply to trustees, the judge commented:
"That's beside the point. These algorithms aren't written by dear God in heaven. Companies can't hide behind algorithms."
Long-term objectives and risk management
Well before the emergence of COVID-19, The Pensions Regulator was clear that it wanted to see trustees have long-term plans for their schemes. The Pension Schemes Bill 2019 - 21 will (subject to Parliament resuming normal business) enshrine that in law. It has always been good practice for trustees and employers to work together to design long-term plans for their schemes so that they have an agreed strategic approach.
COVID-19 and the economic crisis that has developed in its wake will accelerate the trends towards:
- long-term objectives being set for all schemes; and
- for risk mitigation plans to be put in place for when things get knocked off course.
One of the challenges in this inevitable discussion between employers and trustees though will be how employers can overcome their short-term fears given the financial difficulties most of them will face in the near to medium term to be able to turn to their minds to committing to long-term strategy.
It will be in their interests to do so for that long-term, but they will be nervous about the short-term impact on cash. Looking to the future, trustee boards should reflect on how robust their risk mitigation strategies have been in the context of COVID-19. Take the lessons learnt into the next series of discussions with sponsors about long-term objectives.
What should trustees do next?
As a follow-up to the COVID-19 crisis, we recommend that trustees take the following steps from a strategic perspective:
- Review your scheme against the key industry trends identified in this article.
- Consider altering your response to the accelerating trends.
- Agree an action plan to get ahead and ensure your strategic decisions are implemented.