The Work and Pensions committee has called for a new regulatory approach to ensure private sector defined benefit pension schemes remain part of the pensions landscape.
A report released by the committee today (March 26) said despite a decline in number in recent years, DB pension schemes are still of “critical importance” to savers and the UK economy.
It also warned that two decades of regulatory and policy caution from the DWP and The Pensions Regulator has led to a low-risk approach to investment that threatens to “finish off” the few remaining DB schemes still open to new members.
The report also found the funding levels of the majority of DB schemes have improved which has presented new challenges and opportunities for schemes.
Therefore it has called for a “fresh approach” both to funding regulation and the treatment of surpluses in pension and compensation schemes.
The report urged the DWP and TPR to look at ways of ensuring the reasonable expectations of scheme members for benefit enhancement are met where there has been a history of discretionary increases.
Stephen Timms, chair of the Work and Pensions committee said: “Defined benefit pension schemes are hugely important to savers planning for a comfortable retirement and for the UK economy.
“The improvement in scheme funding levels presents opportunities for both to benefit, but a new approach to regulation and governance is needed to protect the best interest of scheme members and allow still open schemes to thrive.”
After hearing concerns that open schemes would be forced to de-risk unnecessarily, potentially leading to premature closure during its inquiry the committee has called for the government to address such concerns in the final version of the funding code and for TPR’s objective to protect the Pension Protection Fund to be replaced with a new duty to protect future and past service benefits.
Pension Protection Funds are currently sitting at £12bn with the report asking for legislation to allow the levy to be reduced to zero and for compensation levels to be improved.
The committee welcomed the introduction of a trustee register to improve TPR oversight.
It also highlighted TPR’s view on consolidation in the report, including that pension superfunds are one of the main ways to improve governance calling for the required legislation to be released as soon as possible.
A spokesperson for TPR said: “It’s our job to make sure pension savers get their promised benefits, and although funding levels are at their best levels in recent memory with around 80 per cent of pension schemes fully funded, we are not complacent.
"Schemes can rapidly be affected by market conditions, corporate activity and insolvency events, which is why we make sure that effective long-term risk management is at the heart of our approach and the forthcoming DB funding code and regulations. The Code also allows for open schemes with a strong sponsoring employer to invest a significant portion of their portfolio in growth assets.
"We will consider the committee’s recommendations carefully and respond in due course.”
alina.khan@ft.com
