PensionsOct 12 2016

DB pensions have been regulated 'out of existence'

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DB pensions have been regulated 'out of existence'

One in six defined benefit pension schemes will not be able to pay members their full benefits, thanks in part to misguided regulation putting too much pressure on schemes, MPs on the Work and Pensions Select Committee have been told.

Speaking at a committee hearing today (12 October), Pensions Institute director Professor David Blake said out of the approximately 6,000 DB schemes in the UK, 1,000 would not be able to meet their promises to members in full.

This, he said, was in part a result of regulation, which had increasingly treated pension promises as guarantees.

"DB started as a promise on a best efforts basis, and it's been turned into a guarantee. As a result, it's been over-regulated out existence," he said.

"You simply can't have companies delivering promises over 30 years," he added.

He told MPs the DB deficit - which recent calculations have put as high as £1trn - would be a "permanent problem" that would have ramifications beyond private sector schemes.

"My view is DB is dying in the public sector, and that could change attitudes to pensions in the public sector," he said.

Professor Blake warned that the shift from DB to defined contribution meant individuals were now taking on all the risk. But unlike businesses - which "understand what's going on" - he said individuals are not aware of the risks they will have to bear.

The result, he said, would be an increase in poverty in old age.

"There's going to be a bigger crisis [than the current DB funding crisis] coming along, but it's going to be a very personal crisis," Professor Blake said.

Also speaking at the hearing, Rosalind Connor of the  Association of Pensions Lawyers said changing attitudes towards DB schemes were misguided.

"We've all said they're dead and there's not very much we can do about it," she said, but insisted this wasn't necessarily the case, and that "DB schemes are good."

She said the real crisis was the fact that young people could not be members of DB schemes, meaning they would have to take all the risk themselves.

The hearing was the first since chair Frank Field announced the committee would be looking into the wider DB issue, following its more focused investigation of the failure of the BHS scheme.

Former pensions minister Steve Webb was the first to appear before the committee. He said allowing company schemes to reduce benefits if the company was in trouble should be a last resort, recommending instead that the committee look at making DB to DC transfers easier.

He also said it should look it dividend to pension contribution ratios before making any recommendations on benefit reductions.

james.fernyhough@ft.com