If I were a Company Director what would my focus be for 2025?

As we leave 2024 behind, UK defined benefit (DB) pension schemes remain on solid financial ground. Despite wider economic pressures (the Budget will increase cost pressures for companies and the Bank of England has recently confirmed that there was no growth in the economy between October and December), the past year has cemented the trend of stability in funding levels for many pensions schemes. However, given the wider headwinds, the pension scheme might be the best opportunity to create value in this environment.

2024 was a year of significant development and innovation which we explore further in our annual corporate report. Whilst the second stage of the Government Pension Review has been postponed, sponsors need to plan pension strategies within the current framework, and to retain sufficient flexibility to nimbly take advantage of future developments.

These developments mean 2025 is the ideal time to scrutinise existing pension and benefit offerings and use them to create real value to support wider strategic objectives.

So once again, I put on my ‘Company Director’ hat, and think about what actions I should prioritise for 2025

• The new Funding Code requires sponsors to agree a long-term funding and investment strategy. Rather than wait for trustees, ahead of the next funding valuation, sponsors should design the optimal strategy based on its own corporate objectives, and proactively present the proposed journey and endgame to trustees.
• Traditional risk transfer routes can remove pension risk from the balance sheet which can unlock corporate activity and boost investment. Other solutions can offer value in different ways, such as:
  • Insurance transaction structures where some of the risk and reward is shared with the sponsor.
  • A superfund transaction which, for some schemes, offers the potential to transfer the pension risk to the provider at a cost lower than the insurance cost.
  • Use of DB surplus in other ways. Within current regulations, by running a scheme on for longer, the surplus can be used to meet costs such as benefit accrual for active employees, or other employee / pension running costs. This can provide a direct cashflow benefit for sponsors which could be invested in growing the business.
• Whatever the chosen pension strategy, we need to be comfortable with the level of risk including:
  • Primary risks such as investment, inflation, liquidity and mortality which need to be considered when setting the strategy.
  • Systemic risks that have the potential to decimate the progress pension schemes have made to date or shift the insurance market pricing. Examples include cyber risk, regulatory risk, climate change, deflationary spirals and market failure.
• Not-for-profit organisations facing challenges from rising demands for their services, alongside financial pressures can also focus on how best to make the most of pension opportunities to support their objectives.
• From a Defined Contribution (DC) perspective, in the long-run, we know consolidation is at the heart of Government intentions.  Collective DC schemes are likely to gain further momentum for certain industries and larger employers. But in the shorter term, we can expect the 2025 Pension Schemes Bill to look at a new value-for-money framework, consolidation of small pots and new requirements in relation to retirement offerings for members.  We should ensure the offering we give current employees is suitable, competitive, future-proofed and compliments our preferred endgame strategy for our DB scheme.

I am of the view that 2025 will be a huge pivot point for pension scheme sponsors. As the line between corporate and pensions strategy becomes increasingly connected, it is critical for businesses to align their pensions considerations with broader objectives. This can give the opportunity to leverage recent developments to transform pension schemes into powerful tools for achieving long-term objectives.