Pensions Talks Interview: Jane Higgins, Partner at A&O Shearman

Jane Higgins, Partner at A&O Shearman, provided her perspective on key pension trends, including surplus reforms, employer access to funds, the continued rise of buy-ins and buy-outs, and the challenges around ESG investing and DC contributions.

1. The government announced plans to reform the rules and regulations around accessing surplus in DB pension schemes. How can schemes manage a pension surplus and what are the best options?
   
   If a scheme hasn’t yet got a surplus and still has contributions going in, then an escrow type arrangement can be quite helpful as it provides some flexibility.  Once a surplus has already built up within a scheme, then it’s one of those areas where it’s quite scheme specific – where the surplus has come from, the scheme’s benefit structure and what the scheme rules say about how surplus can be used are all important when looking at what can be done with a surplus. I expect that will be true even after the reforms to surplus rules, though we don’t know for sure yet.

2. The announcement outlines that there will be a legislation to create an overriding power for employers to access scheme surplus with the consent of scheme trustees. What do employers need to consider?

   Well, if the trustees’ consent is needed (as we expect) then it’s going to be important to be able to make a case to the trustees that using surplus for the employer’s benefit is the right thing to do. So, looking at where the surplus has come from and whether the scheme was contributory for members is important.  Also looking at the scheme’s benefit structure and the extent to which for example pensions have some inflation protection. The scheme rules are also important, and in particular looking at what would happen to the surplus if the employer and trustees don’t agree to use the overriding power.  If the trustees have a unilateral power (or requirement) to use the surplus to augment member benefits, then the story needs to be that much more persuasive.

3. We’ve seen record number of buy-ins and buy-outs. Do you think this trend will continue in 2025? Are more employers looking at other options such as, running on the scheme?

   We’re still seeing a lot of interest in buy-ins and buy-outs and don’t think that will tail off any time soon. As schemes have become better funded, some of them have had to do more work to get themselves insurer ready by doing rectification projects – but those are starting to be completed now and so more schemes are getting ready to do a risk transfer. We are seeing some larger schemes look harder about whether risk transfer is the right option, yes, and some of those deciding to run on at least for the time being – but less so with smaller schemes.

4. Recently we’ve seen a backlash against ESG from institutional investors (like pension funds) and US-based, focused asset managers under political pressure. For example, we’ve seen The People’s Pension pulled £28bn from State Street pushing back against the retreat from ESG. What are the likely implications of this?
   
   Yes, we are seeing some of this, particularly where there’s a US connection. In the UK, the fact that there’s been some element of retreat from ESG investing in the US doesn’t really change the process that trustees need to go through when looking at ESG factors in their scheme investments.  Most trustees aren’t mandated to invest in a way that pursues ESG goals, nor are they mandated to stop doing so – instead it’s about taking relevant factors into account when they’re investing. It’s hard to see that ESG factors could realistically not be treated as relevant factors in the future – I really hope not.

5. What do you see as the biggest risks to member benefits in the coming years?

   I would hope that both DB and DC benefits are well protected – but as more people are retiring with only DC savings, the level of DC contributions becomes more important. There has always been a risk that both employers and members assume that the statutory level of auto-enrolment contributions is geared towards providing an appropriate level of income in retirement, and many people may be in for a shock if they go through their working life on minimum contributions only. That together with the pressure of cost-of-living increases is putting pressure on the level of contributions that are going into DC pots.  So, I think lower contribution rates together with some lack of engagement with pensions is a real risk to benefits.