Defined Benefit  

Three ways to fill the £700bn pensions hole

Three ways to fill the £700bn pensions hole

An actuarial firm has come up with three ways to try to save other pension schemes from suffering the same fate as members of BHS, Carillion and British Steel retirement funds.

Making changes to scheme members' inflation protection, allowing more tax relief to companies and creating a rescue process for pensions are possible solutions to solve the current £700bn hole, according Xafinity Punter Southall.

This figure is how much it would cost to immediately insure pensions and prevent another case like Carillion, which is not feasible, said the pensions consultancy firm.

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The collapse of government contractors Carillion led to the rescue of the business' defined benefit (DB) pension schemes by the Pension Protection Fund (PPF).

Prime minister Theresa May has, in the meantime, vowed to stop company bosses from profiting while putting their workers’ pensions at risk, with tougher regulation expected in the government’s DB paper to be published in the spring.

According to Wayne Segers, head of transaction services at Xafinity, “it is encouraging to see the stance taken by the prime minister to look at strengthening the position of pensions”.

He said: “But forcing companies to fund pension pots to guarantee there is not another Carillion would cost over £700bn. 

“That is the cost of insuring all pension schemes according to the regulator’s latest figures. This is simply not feasible because the burden of this cost will be spread unevenly among stronger and weaker companies.”

Instead, the government “can take meaningful action to try to minimise the impact of failures such as Carillion,” Mr Segers said.

Xafinity’s first recommendation is that the government should allow distressed employers to link benefits to consumer price index (CPI) instead of the retail price index (RPI).

With all other things being equal, whether RPI or CPI indexation is used could result in a 5-10 per cent difference in the scheme’s liabilities, according to an estimate from The Pensions Regulator (TPR).

However, several DB schemes have rules mentioning specifically that benefits need to be indexed to RPI, which means that they cannot change the criteria.

Last week, British Telecom (BT), which was seeking approval to switch the rates, lost a case in High Court.

Xafinity said that CPI “still allows for inflation protection and arguably uses an index that may better reflect the inflation pensioners will experience”. This change “may allow relief which supports capital investment in a business,” it added.

The firm’s second recommendation is that the government look at providing tax relief for the value of any meaningful contingent asset as if it were a contribution to the pension scheme, since “it has been shown time and again in cases of business failure that pension schemes suffer less when they have similar protections to lenders”.

Xafinity's third suggestion is the creation of a rescue process for pensions, which could be similar to a Creditor Voluntary Arrangement (CVA), where all parties (company, trustees, TPR and PPF) can put forward their view.