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If I were a Company Director what would my focus be for 2023?

Pensions & benefits
Gordon Watchorn Partner and Head of Corporate Consulting

We have seen a huge improvement in funding levels for pension schemes on the whole over 2022 and the focus for many sponsors has turned more to surplus management and “not going backwards”, rather than traditional downside concerns.

Whilst some schemes were hit by reductions in hedging levels and lost out financially following September’s mini budget, many more have burst through funding targets and are now in the healthiest position to date.

Here, I once again put on a ‘Company Director’ hat and think what action should I be prioritising for 2023?

  • Get an updated picture of the scheme’s funding position against long term targets. If 2022 has led to material improvements, then in many cases it will be in the interests of the business to make sure cash is not being committed directly to the pension scheme if it isn’t needed.
  • Where appropriate, review required contributions and/or consider offering alternative forms of protection in the improved funding environment, eg:
  • Future contributions into escrow rather than into the pension scheme?
  • Future contributions contingent such that they are switched off when certain funding triggers are met?
  • Offer alternative forms of security, instead of cash, to pension trustees which may be a more efficient use of resources?
  • Re-assess the ultimate target and the strategy for achieving it. Sponsors, having paid substantial contributions to their pension schemes over the last two decades, should therefore look to ‘own’ how the final part of the journey is run, including proactively taking proposals to trustees rather than responding reactively. This may involve bringing forward target timescales for insurance, carefully examining and adapting the investment portfolio for consistency with this target, and planning for how best to access any surplus funds that are above and beyond those needed to secure members’ benefits. Or it may involve running schemes on beyond this target to generate greater surpluses, and bringing value back to the sponsor in some form.
  • Understand the balance of powers between sponsors and trustees in the scheme rules. Items which may have historically been seen as ‘things to think about in the future’ are now more pressing. For example, positioning on items (2) and (3) above will be very different if pension scheme rules are flexible and ‘employer-friendly’, compared to rules under which trustees have the majority of key powers (eg power to amend benefits and power to determine how surpluses are used).
  • Keep pensions high on priority lists. Directors have numerous stakeholders to manage, and legacy pension commitments may not always be highest priority. However, we’ve waited 20 years to be in the position we find ourselves in today – and 2023 is going to be a critical year for proactively locking in that good news where sponsors choose to own the next stages of progress.

My personal view is that once a scheme of reasonable size is well-funded and well-managed, the risks of running it on beyond reaching full funding on prudent measures are certainly manageable and the potential rewards of running on to generate greater surplus (eg perhaps to meet future DC contributions for existing employees) may outweigh the risks in many cases.

There are - as always - many detailed considerations to work through on pension schemes, but 2023 will be a year where more directors must ensure the sponsor’s objectives drive the high-level strategic journey whilst working collaboratively with trustees to ensure the detailed considerations, and member outcomes, are simultaneously prioritised. It will be a fascinating period for all of us involved in pensions, and we should embrace innovations along the way.