News | March 22, 2022

Part 1 – Volatility and Ukraine

Published in Pensions Age, Paul Ashcroft discusses volatility and Ukraine, including The Pensions Regulator (TPR)’s latest guidance.

The Pensions Regulator (“TPR”) has set out its expectations following the Russian invasion of Ukraine, the sanctions imposed by the UK government against Russia and Russian individuals and the ensuing volatility in investment markets. TPR has called upon pension scheme trustees to be vigilant and consult their advisers about any action that trustees may need to take, or must take to comply with sanctions.

We consider each of TPR’s key expectations in turn below:

1. for defined benefit (DB) schemes, the short-term liquidity needs and how those needs might be affected by margin calls and the need to meet short-term member benefit payments

In other words, DB pension scheme trustees should consider whether the impact of sanctions may affect liquidity and the scheme’s ability to meet any payments. This will involve working closely with scheme administrators and investment managers to ascertain what (if any) impact there might be and the extent to which any of the scheme’s investments need freeing-up.

Trustees should, however, take a cautious approach to any changes to the scheme’s investments and should refrain from making hasty decisions around the scheme’s investment portfolio. Pensions are, after all, long-term investments. Market volatility is part and parcel of investing.

2. whether the employer or sponsor of the scheme has been affected, which for DB schemes may have consequences for the employer covenant: for example through any direct impacts to employer operations, through wider trading links where suppliers or customers are impacted, or through broader macroeconomic factors such as increased inflation, rising fuel prices or foreign exchange risks

The key question for DB schemes here is: what can be done to protect against any weakening in employer covenant? Should trustees be seeking a higher employer contribution to the pension scheme? Can any guarantees or security be put in place to help protect against market failures?

It is vitally important for trustees to understand the impact on economic factors and pressures on sponsoring employers. Communication between employers and trustees is key. Asking an employer representative to provide a confidential covenant update at trustee meetings can be an effective means of maintaining regular communications.

3. the likely impact of these events on your scheme’s investments including short/medium-term risks

Many high-profile UK pension schemes have reduced their exposure to Russian assets in response to Russia’s attack on Ukraine including: The Transport for London Pension Fund, the Church of England Pension Fund, and the Universities Superannuation Scheme, to name just a few. The Pension Protection Fund (“PPF”) has also announced that it has lowered its exposure to Russian assets. As at 7 March 2022, the PPF’s remaining allocation stands at less than 0.01% of the total value of the fund.

Trustees have a legal obligation to act in the best interests of members. It has long-been established that this usually means members’ best financial interests. Therefore, the most legally straightforward way for trustees to decide to disinvest from Russian assets (if possible) is where there are financially motivated reasons for doing so. For example, due to medium-term financial risks or to secure greater protection for the scheme’s assets.

4. in light of the potential heightened risk of cyber-attacks in the current environment, whether your cyber safety procedures remain adequate or need further consideration

TPR has produced helpful materials to help trustees assess and understand their exposure to cyber risks which can be found by clicking here.

Pension scheme trustees that don’t yet have a cyber security policy may wish to consider putting one in place. A clear policy is often the starting point for documenting the steps that trustees have taken to assess the risks, establish controls and monitor and report incidents and risks. Effective cyber and data protection policies can help evidence steps schemes have taken to mitigate risks which can be valuable protection in the event of member claims.

5. the potential for heightened risk of financial crime, including scams, and whether related processes and procedures should be reviewed

Con artists jump for joy when inflation rises and stock markets fall. This is because frightened investors and pension scheme members are more likely to fall for scams to transfer their benefits elsewhere in an attempt to protect against the hit to their investments. Of course, these transfers are often not what they are made out to be!

TPR’s call to not make over hasty decisions is as relevant for scheme members as it is for trustees. Further guidance on avoiding pension scams can be found by clicking here. You can also find more information on the latest rules and regulations governing pension transfers and protecting against scams in our previous article here.

6. whether investments remain aligned with the policies and principles set out in your statement of investment principles, including environmental, social and governance considerations

Trustees should also consider whether their statement of investment principles (“SIP”) needs updating following any decisions to change their scheme’s underlying investments. In particular, the law requires schemes with more than 100 members to prepare a SIP and ensure it is reviewed at least every three years and without delay after any significant change in investment policy (regulation 2(1) of the ‘Investment Regulations’).

Key Takeaways

For us, the key takeaways are:

  1. pensions are long-term investments – trustees and members alike should bear in mind that investment decisions should not be made in haste without due consideration;
  2. consider the impact of these events on scheme investments and whether there is a financially motivated reason for departing from Russian assets; and
  3. be aware of the heightened risk of cyber attacks and scams by maintaining good due diligence practices.

TPR’s full article can be found by clicking here.