Defined Benefit  

Regulator admits DB members face accepting smaller benefits

Regulator admits DB members face accepting smaller benefits

The Pensions Regulator has admitted that defined benefit pension scheme members may have to accept smaller benefits than in the past if it is a case of "saving the business".

In June this year, the Pension Protection Fund criticised a radical government proposal to cut benefits for members of the British Steel Pension Scheme, saying it would not want to insure a scheme that did not have a proper sponsoring employer.

A Cass Business School report published in August this year investigated some of the reasons defined benefit pension schemes have run into problems, identifying 20 ways in which scheme surpluses have been exploited.

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One in six defined benefit pension schemes will not be able to pay members their full benefits, due in part to misguided regulation putting too much pressure on schemes, the Work and Pensions select committee was told earlier this month by the Pension Institute.

Responding to a question from Financial Adviser on whether defined benefit scheme members would have to accept smaller benefits in the future following restructuring deals, Andrew Warwick-Thompson, executive director at The Pension Regulator, said some members "may well have to accept" lower benefits.

"Under those circumstances, under an RAA [regulated apportionment arrangement] the members may well have to accept it [smaller benefits] because it is a question of saving the business," he said. 

"The business may not survive, it may collapse, it may mean that they lose their jobs if it does, and it would mean that the scheme falls into the PPF.  What we are trying to do if we are approached in relation to an RAA is to make the position as sustainable as we possibly can and to keep the pension scheme out of the PPF."

He added that when approached for an RAA, The Pensions Regulator deals with this on a "case by case basis".

"We have not seen a dramatic increase in those [restructuring deals]. If companies come to us and said they are concerned about debt restructuring within the employer or if they are concerned about a company’s dividend policy or share buyback policy then we will support them in negotiations with the employer to get a fair deal within the pension scheme."

Mr Warwick-Thompson also raised concerns over the coverage of deficit figures in the media, stating it was "ill-informed and irresponsible".

He told Financial Adviser there are a small number of schemes and employers that are in distress, in hundreds not thousands, and that they represent a relatively small proportion of schemes at about 2 per cent of the headline deficit figure.

"The scheme specific deficit figure as at the end of August we calculate to be around £400bn.

"In fact that number fluctuates all the time, and because of the increase in bond sell-offs at back end of last week that deficit figure has probably come down by tens of billions I would guess, but we haven’t done the numbers."