Putting pensions on the boardroom agenda

Rowena Morris:

Welcome to the latest episode of our Business in Focus Podcast. I am Rowena Morris and I am your host for today's episode. Over the course of these podcasts, we've talked a lot about the changes and challenges we face in our working world. Today, we extend that view to pensions, from economics to ESG, regulation to recovery plans, what are the urgent issues for discussion that may have been lost in the noise so far. Looking further ahead, as many of us contemplate a very different work-life balance, how can organisations help their employees understand what this means for their retirement. Given the slow down on the issue shaping the agenda, as well as bringing to life some ideas to help shape your strategy, I'm joined today by Raj Mody and Shanu Ghai. Raj is our global head of retirement and pensions consulting and Shanu is one of our actuaries based in our Midlands office. Thanks for joining us both. There's no shortage of topics for us to cover today, but before we get started, let's kick off with some intros. Raj, could you share a little bit about you.

Raj Mody:

Sure, hi Rowena, I am Raj Mody, and as you say, I lead our pensions consulting business here at PWC. So, I'm very lucky to get to work with some fascinating clients on a wide array of pension challenges and issues, and I'm also involved in developing our business more generally. Putting that together, gives me a great overview of some of the trends and challenges that the pensions industry and companies that are likely to face over the next few months and years. I am looking forward to getting into some of these today.

Rowena:

Brilliant and great to have you here in our virtual studio. Shanu, it would be great to hear a quick introduction from you too.

Shanu Ghai:

Hi, I am Shanu Ghai, and I am a pensions actuary in the Midlands. I joined PwC six years ago, when I left university, and even having chosen a career in pensions, I hadn't at all appreciated at the time that I'd be saving for my own pension from such a young age. In fact, the average age of employees at PwC is under 30, as I'm sure it's the case for a lot of businesses in the UK. There are a lot of young employees who don't necessarily appreciate where their income is going to come from in retirement, with so many other financial pressures and sources of uncertainty in young people's lives at the moment, pensions is just not really on that list. I'm looking forward to discussing that a bit more today.

Rowena:

Brilliant, thanks both, I am looking forward to hearing your perspectives. Let's start with a bit of a high level update for the benefit of our listeners. It's been a year of disruption and rapid change to say the least. Raj, what impacts in the pandemic have we seen on pensions?

Raj:

There has been a huge impact on pension arrangements during the period of the pandemic, not so much necessarily because of the pandemic itself, but as much because it just so happens that over the last 18 months there has been a raft of new rules and regulations, which affects how pension schemes need to be run. If we break it down into two categories, there's defined benefit pension schemes and defined contribution pension arrangements and our focus just to start with on defined benefit. Some of these schemes are closed, and in fact, most of them are closed, but that doesn't really matter, because if you have a defined benefit pension scheme on your balance sheet, you will still be affected as a company by these issues. You could boil it down to questions. Number one, how much money needs to be in the pension scheme to fund the benefits, and number two, what do you do with that money, how do you invest it.

We track the funding stages of pension schemes on a regular basis. I found this year, actually, that pension schemes on the whole are in really good financial health. That's the combination of very large amounts of cash contributions being paid into them over the last decade, and some quite strong market returns overall. That might seem like good news and it is a tipping point for sure, but actually now companies are turning their attention to, have we got too much money in the pension scheme. What else could we be doing with money that was otherwise reserved for the pension schemes instead of paying it into the scheme in the future, can we be reinvesting in the business, sorting out our own balance sheet, down debt, transforming our business strategy, and so on, so that's one big question. The second one, how to invest the money. The basic point here is that even if you had what might have been a perfect strategy a couple of years ago, markets have changed so much, that it's likely some elements of that strategy are now out of date. In fact, we've been brought into situations where some decisions are now negative for the portfolio. They may have made sense a while back, but now they're a drag on performance and the risk balance is all out of kilter.

Rowena:

Really interesting, and Shanu, how are you seeing these issues play out in conversations with clients?

Shanu:

It's becoming clear that employers are taking these issues a lot more seriously now as the pandemic has really put the spotlight on business expenditure. As Raj mentioned, the second point around where the money is being invested, is also becoming increasingly more topical. Businesses have spent a lot of time over the last 18 months to determine what's important to them, their philosophy, their values. We're really seeing the broader impact of this on some accelerated trends, for example, ESG, where are the funds being invested, how does pensions connect to the business's social commitments, and are they aligned with the business's environmental focus. It's even more of an urgent issue for DC schemes, where members have a choice over how their retirement pots are invested. Are businesses ensuring that their employees have an adequate choice of investments, and that includes a default investment fund that's considered to be green, and do they know how their employees are saving. There's a lot of considerations that may not have been on the priority list before.

Rowena:

Yeah, as you say, a lot of agenda items there for our listeners. Thanks for the whistle-stop summary. Before we dive into some of those steps or conversations to have, I'd be really interested to spend a bit more time looking at the people angle and what that means to company's current workforce. You mentioned the impact on retirement and pensions of some of our favourite conversation topics such as hybrid and flexible working. How can organisations help their people understand and also plan for their retirement? Shanu, can we start with you for an on-the-ground perspective?

Shanu:

Absolutely, as I've said there's definitely a lack of appreciation for retirement planning at a young age, but how can young people be expected to save for retirement when that retirement is becoming ever increasingly further away. For me, personally, I know I won't be retiring for at least another 40 years and that's a scary thought, but what's even scarier is having to make choices now, based on how much I think I'm going to need in retirement, for how long I think I'm going to live. There's a lot of uncertainty, there are a lot of unknowns, but there's also the balance between current needs and future needs. For young people like me, current needs include paying off the student loan, saving for a mortgage, keeping up with the cost of living, saving for the near future, it is a very long list, but the reality is that list is just likely to increase, and the future needs become closer and closer as time goes on. We really need to take action now to ensure we can retire before we are 80.

Rowena:

The message that's coming out loud and clear is really that ability to act now and start planning. Raj, can I bring you in here to help our audience start to frame these concepts in terms of their boardroom level conversations?

Raj:

You may well ask, well what is an individual's long term savings plan and financial plan, what has that got to do with boardroom level business strategy conversations. The answer is, what if you end up with a workforce who can't afford to retire, what do you do with that older cohort of the workforce. They may need to be retrained or up skilled, and that's got its own challenges. There is a cost of maintaining that segment of the workforce, which may stop you from investing in new recruitment or differently skilled recruitment that you need to keep your business strategy up to date. There is a very direct bridge between the issue of your employees plans for retirement and the education and support you give them, right into the ongoing viability of your business strategy.

Rowena:

Let's keep with the boardroom agenda for now, just to bring things to a close. We like to always leave our listeners with some really practical next steps. Thinking across the topics that we've covered, what would be your main actions or points we'd advise companies to start discussing now, Raj your thoughts?

Raj:

With things changing so quickly and so frequently on the pensions front, new rules and regulations, and in fact, there's more to come. A good place to start is what we would call a position review or a situation review. What that does is look with a fresh pair of eyes at how all of your arrangements are being run. Everything spanning from the assumptions that you use to work out how you finance your pension schemes, we talked about the investments, and the decisions you're making about your asset portfolio, and they can be cross checked against current market positions and trends. You can also look at the governance of your arrangement. By that we mean that, when you've got a defined benefit pension scheme, it's akin to having a standalone business subsidiary on your balance sheet, and what is the leadership team or the management team that is running that subsidiary, which can often be very material relative to the size of the overall company. All of those things can be reviewed, and you can identify the gaps and work out a plan to plug those gaps and optimise your approach.

Rowena:

Fantastic. Shanu, can I come to you for some steps on those longer term issues such as financial wellness and engaging the workforce, what steps can businesses take now to get those in train?

Shanu:

For me, it's really three key steps. The first, understanding how the current workforce are saving for their retirement. The majority of young people are likely to be eligible for only DC schemes where the onus is really on them to decide how much risk they're willing to take, how much of their income they want to put away. It's really important to just have a view of what the current workforce is doing. The second, as I've mentioned a few times, so providing the resources employees need to understand their financial requirements, their retirement needs, how much they can reasonably afford to put away and just providing that education on the risks and rewards, etc. Then finally, what I think is really critical is providing an attractive pension arrangement. Ultimately, the more attractive it is, that's both in a financial sense and non-financial, how much is the employer contributing, but also how easy is it to make changes to understand the pensions arrangement, the more attractive that is, the more attractive saving for retirement will be.

Rowena:

That’s really helpful and to think about it and those three steps is really good. Thank you very much both and thanks also to everyone for listening. To find out more about some of the pensions issues we've discussed and start planning what that means for your strategy, please head over to our website at pwc.co.uk/pensions. Also, lookout in the new year for our new pensions focus podcast, pension cast, you heard about it here first. Please subscribe to keep up to date with all of our latest episodes and until next time, thanks everyone.

Participants

• Rowena Morris
• Raj Mody
• Shanu Ghai