In search of a lasting settlement

In search of a lasting settlement

While accepting that the system may not be perfect, the government, in its recently published Green Paper on the sustainability and security of DB pensions, does not seem to believe there is a significant structural problem with the funding and regulation of DB schemes.

Their view is that deficits will shrink for most schemes, if employers continue to pay into them, and that the evidence does not support the view that promised pensions are unaffordable for most employers.

That evidence and the various changes that have been suggested by stakeholders are divided, in the 100-plus page Green Paper, into four broad areas:

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1.    Funding and investment.

2.    Employer contributions and affordability.

3.    Member protection.

4.    Consolidation of schemes.

With pension scheme deficits, on a buy-out / solvency basis, doubling since the current funding regime was introduced, despite £160bn of additional contributions from employers, the opportunity to strike the right balance between ‘security’ and ‘sustainability’ for DB pensions should not be missed. Everyone with a stake in the efficient operation of DB schemes and their sponsors should get involved in this debate.

Funding and investment

In relation to the DB funding regime, it has been concluded it is not clear that, in general, discount rates being used in schemes are overly pessimistic, and there is no strong evidence to demonstrate a systemic issue with the current flexibilities available.

However, when considering DB scheme investment strategies and asset classes, there is an appetite to explore whether there is scope to encourage or facilitate some schemes to make more optimal investment decisions, and to mitigate any barriers to the greater use of alternative asset classes. Also, with regards to the quality of scheme trustees’ investment decision making, further research is to be commissioned on this, and also to investigate the factors that influence investment strategies and the choice of asset classes.

Employer contributions and affordability

The government is not persuaded there is a general ‘affordability’ problem for the majority of DB scheme sponsors. For this reason, they do not agree that across the board action is needed to transfer more risk to members or to reduce members’ benefits in order to relieve financial pressure on employers.

However, it is recognised that there are exceptions and that new measures may be appropriate for ‘stressed’ schemes. Feedback on this area is sought, covering both options and the moral hazard issues that they raise.

Member protection

Ostensibly, the appetite for change is more evident under this heading with new powers for both The Pensions Regulator (TPR) and scheme trustees considered. The former could have new powers in relation to corporate transactions and information gathering. The latter may get more rights to demand information and engagement from employers. However, the government does want any changes to be proportionate and affordable (changes could mean an increased levy or even TPR charging for some services).   

Consolidation of schemes

The final area considered is the issue of consolidation of schemes. It is observed that most DB schemes are small and that, according to the data, these schemes have higher running costs and less effective governance. Arguments for and against the aggregation of smaller schemes into one or more consolidation vehicles, including ‘superfunds’ are considered, with views invited on the optimum model.