‘Schemes need to guard against inertia’ – warning from new LCP report

LCP’s new Chart Your Own Course report analyses the experience of DB pension schemes, highlighting the varied impact that Covid-19 has had.

The majority of schemes surveyed (75%) said that they have taken no material action to change their investment strategy or journey plans. Whilst for some, this may be reflective of their robust planning, LCP warns that inertia may be damaging for others - now is the ideal time to make sure you have a framework and plan in place.

Key findings from the survey within the report include:

• While around 40% of survey respondents felt that both their funding and covenant positions were holding up, 60% have seen either funding or covenant deteriorate, or both deteriorate
• More than 60% think that it’s too early to tell if government support has been enough to support scheme sponsors who are struggling
• Around 10% of schemes agreed a deferral on contributions – most of these for a three-month period
• 40% of schemes thought they would have some contingent funding in assets, cash or credits in place for their next valuation

The report urges schemes to take several steps to prevent them being buffeted by potential economic storms ahead and to put them in the best place for any regulatory changes.

1. Determine the destination of the scheme and keep this under review as new options emerge
2. Understand the covenant, investment and funding risks and how they could jeopardise the long-term plan – innovative solutions involving contingent assets and/or contributions could be increasingly popular
3. Expect the unexpected: resilience to change could be the difference between success or otherwise

Jill Ampleford, LCP Partner and report author, commented:

“Since the regulator set the direction of travel towards long-term journey planning back in March, schemes have had to navigate unexpected choppy waters as a result of Covid-19. We don’t know what the true economic fallout of the pandemic will be, so it’s understandable that schemes may want to simply batten down the hatches. However, schemes need to guard against inertia and instead make sure they have a robust journey plan.”

Mary Spencer, LCP Investment Partner and report author, added:

“Schemes are expected to take account of a wide range of risks, including investment risk and the risk of the sponsor not being around in the future. It is vital that schemes review the extent to which Covid-19 has changed these two key factors and revise their approach. More generally risks don’t stand still, so a scheme’s ability to adapt to change could make all the difference”.