2024 UK pension predictions

03 January 2024

Ian Bell, head of pensions, and Guy Mander, head of covenant advisory at RSM UK, discuss the key issues and trends that are likely to be at the forefront of the pensions sector this year, including:

  • technological integration and digital transformation;
  • evolving regulatory landscape; 
  • ongoing monitoring of covenant; 
  • more ‘end game’ options; 
  • Mansion House reforms; and 
  • the new DB funding code. 

Ian Bell, head of pensions at RSM UK, comments: ‘The acceleration of digital technologies is set to revolutionize the way pension providers operate and engage with their clients. In 2024, we anticipate an increased adoption of artificial intelligence and machine learning to enhance investment strategies, risk management, and personalised financial advice. Automated chatbots and robo-advisors are likely to become more common, offering cost-effective and efficient solutions for pension scheme members. With the focus increasingly on the defined contribution (DC) world, blockchain technology may start to play a key role in securing and streamlining pension administration processes, ensuring transparency and reducing the risk of fraud. Smart contracts, powered by blockchain, could automate various aspects of pension agreements, facilitating smoother transactions and minimising administrative overheads. 

‘Pension providers can expect continued scrutiny and changes to regulatory frameworks. Greater focus on environmental, social, and governance (ESG) considerations may result in stricter guidelines for pension fund investments. This shift reflects a growing societal awareness of sustainable investing and responsible financial practices. Members of pension schemes are likely to demand greater transparency regarding the environmental and social impact of their investments, prompting pension providers to integrate sustainability considerations into their decision-making processes. Additionally, regulatory bodies may introduce further measures to enhance cybersecurity in the pensions sector, safeguarding sensitive personal and financial information. Compliance with data protection regulations is likely to become even more stringent, necessitating robust cybersecurity measures and proactive risk management strategies.’

Guy Mander, head of covenant advisory at RSM UK, commented: ‘The rapid rise in UK interest rates over the last two years may have had a positive impact on scheme funding, but the negative impact of this and inflationary cost pressures has been seen in a continual increase in balance sheet restructurings and corporate insolvencies. Given that interest rates are not expected to fall materially from current levels in the near term, this pattern is likely to continue in 2024 as more debt matures and lenders become increasingly reluctant to support those businesses, which might be struggling to service their debt. More schemes are therefore likely to be asked to accept deficit recovery contribution (DRC) deferrals, to compromise members’ benefits or to fall into the Pension Protection Fund. Trustees need to be prepared for this and, in many cases, be proactive in monitoring the employer’s position and undertake contingency planning as appropriate. 

‘Congestion in the buy-out market is also likely to continue, so employers and trustees will be keen to implement an effective holding pattern to protect scheme funding levels and members’ benefits or consider alternative options. 2023 has already seen the first ‘superfund’ transaction concluded by Clara and we predict a continuing shift towards consolidation generally and an increased range of Capital Backed Journey Plan structures.’

He added: ‘Despite the emphasis in the Chancellor’s Mansion House speech on the need for the UK pensions industry to take on more risk and support investment in UK companies, the maturity and high funding levels of so many defined benefit (DB) schemes and the general sentiment of trustees wanting to ‘lock-in’ their hard-earned positions, suggests the productive finance elements of the Mansion House reforms will likely be seen more widely in the DC world, with the longer time horizons and the need to improve outcomes for DC members. 

‘Whilst a change in government is anticipated, we expect the DWP’s Occupational Pension Schemes Funding and Investment Strategy and Amendment Regulations to come into force in the early part of 2024, embedding the need to assess the employer covenant in legislation for the first time. If, as current thinking suggests, these regulations and the new DB Funding Code will all be in place and relevant for actuarial valuations dated from August 2024 onwards, the new DB Funding Code will need to follow quickly behind the release of the new legislation.’