Our top five pensions predictions for 2014

1: 2014 looks set to be a record breaking year for pension risk deals

Ben Stone, Pensions Risk Consultant in our Pensions team, said:

“2013 was a record year for risk transactions. Attractive insurance pricing combined with strong asset performance, led to a level of bulk annuity transactions not seen in five years. In the area of longevity swaps, the month of December alone saw more completed transactions than in some historic calendar years as a whole. Reinsurers, who are the ultimate risk taker of longevity risk from both bulk annuities and longevity swaps, will be classing 2013 as a successful year and looking forward to further business all through 2014 from projects already kicking off.

“As we head into 2014, our research reveals that pension schemes representing over £100bn of pension liabilities are currently considering some form of insurance based de-risking approach.  Schemes' appetite for buy-in opportunities is still strong and we are seeing more interest in longevity swap deals than ever before. This year we can expect to break new ground in terms of the number and size of transactions completed, and also the structures used to facilitate the risk transfer.”

2: Auto-enrolment providers are heading for a capacity crunch in 2014

The pensions industry has already enrolled over 2.5m new people into a pension. The industry needs to handle a further 6.5m enrolments in 2014.

Peter McDonald, our Chief Actuary, said:

“In the first two months of 2014 alone, 40% more employers are due to stage (5,300) than have already staged since auto-enrolment began last year (3,670). In the second quarter over 30,000 more employers are due to stage, dwarfing the number of employers which have staged to date. This comes at the same time as the charge cap and bans will take effect, meaning thousands of employers will potentially need to rebroke their pension schemes. This raises the real risk of a capacity crunch in the pensions market, with some providers unable to take on any new members.

"Employers are going to have to be smart about their auto-enrolment solutions, and potentially plan for and react quickly to contingencies if original plans don't work out."

3: Technology will be a game-changer in the market

2013 was the year pensions technology hit the mainstream. Companies and trustees are turning to developments in technology to manage their pension liabilities in a faster, less costly and more informed way.

Raj Mody, our Head of Pensions, said:

“Funding defined benefit pension schemes remains a huge task for companies and the uncertainty over just how much cash companies will need to put into their pension schemes is often halting other business decisions such as investment and growth plans. There is overwhelming appetite in the market to manage pension liabilities in a more impactful and efficient way. Our Skyval platform allows companies and trustees to run all their routine pensions actuarial calculations off one platform regardless of how many or which advisers they use. They can also run sophisticated modelling which allows rapid and efficient completion of financing and risk management exercises. This technology development, which includes unique and exclusive benchmarking functionality, is producing real value for trustees and sponsors. Skyval is currently being used by over £50bn worth of pension schemes and we expect the demand to only get stronger in 2014 as Skyval increasingly becomes the industry-standard approach."

4: Workplace and state pension reforms will remain in the spotlight

Last year George Osborne confirmed what had long been expected, a rise in the state pension age is to be brought forward to 68 by the mid 2030s. A rise to 69 will be brought forward to the late 2040s. We project that the linkage to life expectancy means someone starting work now will have to wait until they are aged 72 to receive their state pension. A child born today is unlikely to receive their state pension until they reach 75. These changes leave many people facing the choice of saving more money privately or work for longer to fund their retirement.

David Cameron started the year saying his party would retain the ‘triple lock’ if they win the 2015 general election. At the same time, the Government has a number of proposals to reshape workplace pensions.

Raj Mody, our Head of Pensions, said:

“State pension reforms will remain a huge issue in 2014 as the implications of pushing back the state pension age becomes clearer for savers. The move away from final salary pension schemes to one where the employees take on the majority of the risk means adequate retirement funding will continue to rise in importance for people. People will be keen to have a clear view on when they will receive their state pension and how much it will be, to ensure they can adequately save for their retirement. Regular reviews of state pension age risk adding more complexity for savers."

5: Pensions will move up management’s and employees’ agendas

There are now 25m people in private sector employment in the UK. With 10m people now enrolled in an occupational pension and millions more people set to join a pension scheme in 2014, defined contribution pension savings are building up rapidly.

Peter McDonald, our Chief Actuary, said:

“As jobs start to feel more secure in 2014, people’s focus will turn to their pay and benefits. Wise employers will tune into this and will demonstrate that they are listening to their employees and offering them the best overall pensions deal possible. Pensions are set to move from being a separate and taken-for-granted element of reward to being a much more important element, which will start to be a key differentiator for employers.”

If you'd like to find out more on any of the topics raised in our 'top five', you can contact Raj Mody, Head of Pensions, on 020 7804 0953 or by email at [email protected]