The Pensions Institute is calling for The Pensions Regulator to exercise its powers more forcefully to ensure “second best” outcomes are an option for defined benefit scheme members.
The institute stated many defined benefit schemes could fold under the existing rules, which requires sponsors to either ensure schemes can pay benefits in full or risk leaving the scheme underfunded if the sponsor becomes insolvent.
It recommends a policy of allowing schemes with weak sponsors to negotiate settlements for their members between full benefits and the level of compensation provided through the Pension Protection Fund.
The institute calls for the government to put in place a statutory minimum contribution rate for all sponsors with schemes in PPF deficit, unless this would make a sponsor with a realistic change of recovery becoming insolvent.
Professor David Blake, director of the Pensions Institute, said: “The difference between the potential value of negotiated benefits and PPF benefits represents a significant loss to members, sponsor organisations, PPF levy payers and society as a whole.
"Instead, seeking ‘the greatest good for the greatest number’ would prevent the destruction of billions of pounds in economic value.
“It would also produce a more equitable distribution of benefits for younger members who stand to lose much more on insolvency because of the way PPF benefits are calculated. But fortunately, we find that most companies can afford to make their pension contributions.”
Darren Redmayne, chief executive of covenant advisers Lincoln Pensions, said: “Research from both the Pensions Institute and the Pensions Regulator shows that some 10 to 15 per cent of defined benefit schemes are unlikely to deliver benefits in full to members.
"Under current regulation these ‘walking dead schemes’ battle on, incurring substantial and unnecessary ongoing fees and being forced to take bigger and bigger bets on investments returns in the absence of other alternatives.
"In doing so, if the bet doesn’t pay off, value is destroyed for members and also other PPF levy payers who will pick up the tab.”
dan.moore@ft.com
