Will 2013 be any easier than 2012 was for DB schemes?
Belgrove: No. Too many major uncertainties remain and the outlook for growth remains challenged. The eurozone situation will continue to hang heavy on markets and a lot of attention is currently focused on the US fiscal cliff negotiations and how that pans out.
Drewienkiewicz: This year was certainly rather more benign than 2011 for DB schemes, but it remains to be seen whether this will continue into 2013. It seems likely the CPAC consultation on RPI will deliver its findings in 2013. The outcome from this is binary, with RPI swaps likely to either fall or rise 20-25 basis points depending on the outcome that is chosen, although a further fall seems more likely at present. Any move down in RPI swaps will have a knock-on effect of raising real interest rates and give DB schemes a further solvency boost.
Green: The short answer is that it can’t be much worse than 2011/12. What we do know is that more trustees are looking at how to manage both the asset and the liability side of the pension fund balance sheet, to enable a move towards easier and less costly hedging of the liabilities. This is a good thing.
Kirton: We do not expect rising long bond yields to come to the rescue, and funding positions will remain under pressure. Some recovery in the UK and US economies (barring any jumping off fiscal cliffs) may cheer investors, but Europe remains a source of concern. Investors will need to be smart, or lucky, in 2013.
What developments can we expect in the defined contribution (DC) space over the next 12 months?
Belgrove: Pensions reform focus will continue to shift for larger employers from strategy affecting scheme and contribution design towards trustees and contract-based providers delivering investment strategies that meet the needs of the changing member dynamics.
Further development of value added investment products into the DC market in part driven by the emergence of the new super trust market will see greater choice for trustees and employers in this market space. For smaller employers many will be spending the next 12 months planning for and implementing the necessary changes to payroll and HR processes as well as the predominantly DC vehicles being used for auto-enrolment.
Drewienkiewicz: I would like to see evidence that a greater number of investment options are being opened up for DC investors, and that further downward pressure on the fees that accompany the more interesting strategies is occurring, although I am not sure if that hope is realistic.
Green: Auto-enrolment is dominating the DC landscape now and will continue to over the next 12 months. Corporate thinking will be dominated by scheme design for their auto- enrolment arrangement – whether they use their current DC scheme, a new scheme or NEST (National Employment Savings Trust) and by communication to employees; in many cases this will be to thousands of employees who are not currently in a pension scheme.
Trustees will be deciding on what the most suitable default fund is for the new mix of members they have. The question of whether one default fund can fit everyone’s differing needs will come up more and more – we believe that in most cases, it can’t.
Kirton: The use of target date funds in the US, and diversified growth funds in the UK will continue to grow as investors seek to build more robust growth portfolios. Elsewhere, there will be some interest in building-in forms of minimum income guarantee, and increasing attention to evolving investment practice to suit income drawdown.
We expect more questioning and more innovation and believe retirement income targeting will receive more airplay next year.
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