The UK's 6,000 defined benefit pension schemes should consider consolidating to avert the future suffering of both members and businesses, the Pensions and Lifetime Savings Association has said.
In its interim report, released today (20 October) the PLSA's DB Taskforce stated that the DB system was "fragmented" and "inflexible", making it "not fit for the future".
It stated that doing nothing was "not an option".
The report's first recommendation was that scheme consolidation should be considered, which it said "could help secure more economically viable schemes able to deliver better value to scheme members and their sponsors".
The second recommendation addressed the "inflexibility" of the system.
"Work should be undertaken to investigate how changes to the system could deliver better solutions to scheme resolution and remove regulation that adds cost but has little or no tangible benefit," the report stated.
It also recommended a more flexible approach to benefit changes - an issue currently being examined by the Work and Pensions Select Committee - and a new approach to risk.
The report examined DB schemes' over-reliance on gilts; the growing gap between DB pension contributions and wage rises; and the impact of the DB crisis on business investment and defined contribution workplace schemes.
It also examined the fragmented nature of the system both from the perspective of small funds which lack scale, and from that of the regulator.
Taskforce chair Ashok Gupta said, while the Pensions Protection Fund addressed some of the risks posed by the funding crisis, members still bear the risk the PPF does not cover".
He said members risked losing 15 to 20 per cent of their benefits, adding member awareness of the issue was "extremely low".
He said in 2015 employers paid £31bn into their DB schemes, including £11bn in deficit recovery payments. This money, he said, could have been spent on "wages, business investment, dividends or on pension contributions to employees in DC schemes".
“The current system has built up over decades but is not fit for the future. It’s time to act. Our analysis shows that the current inefficiency of the DB sector affects not just scheme members and scheme sponsors, but also the even greater numbers of people outside schemes.
"We can do better for the millions of people relying on these schemes, the businesses that support them and the economy at large,” he said.
PLSA chief executive Joanne Segars said the current system was "inflexible and costly" and "only allows for binary outcomes of complete success or complete failure".
"Greater flexibility in the system may help to create better outcomes for scheme members," she said.
"The system is also fragmented and the potential exists for consolidation to deliver better value to scheme members and their sponsors."
Responding to the report, Fiona Morrison, immediate past president of the Institute and Faculty of Actuaries, said: "The report highlights the challenges that all participants in the DB market face, whether sponsors, employees, advisers, government or regulator.
"We look forward to working with the PLSA to ensure the best use the flexibility of the current regulatory structure and to identify whether it is necessary and proportionate to make changes to the existing regime to address future requirements," she said.
The DB Taskforce is open to submissions ahead of its final report, which is due to come out in March 2017.
james.fernyhough@ft.com
