Commenting, Jon Hatchett, Head of Corporate Consulting at Hymans Robertson, said:
“While we agree with the DWP’s conclusion that the majority of employers should be able to continue to fund their schemes and manage the risk their schemes are running, the PPF’s modelling does suggest that in the worst 10% of outcomes around 1000 sponsors could be insolvent by 2030.
“The DWP recognises that the single biggest risk to DB scheme members is the collapse of the sponsoring employer. That’s why looking at sponsor covenant alongside contributions and investment strategy should be the cornerstone of any approach to risk management and scheme funding.
“While it’s important to debate how much cash should flow into schemes in current market conditions, throwing more cash at deficits could make schemes less affordable and redirect funds from valuable business investment. A strong business means a strong covenant. And, as a strategy, simply pouring more money into schemes hasn’t worked for the last 15 years so it is not obvious it will work over the next 15.
“Arguably the focus on deficit headline figures leads to significant cash calls on sponsors and distracts from what is important: meeting the interdependent objectives of ensuring there’s a good chance of paying benefits to pensioners in full and that the there’s a healthy business sponsoring the scheme. A balance needs to be struck, and deficits are part of the picture. But to maintain a healthy business pension contributions need to be kept affordable both now and in future. And if we do that, schemes are less likely to fall into the Pension Protection Fund (PPF), where members lose £50,000 of benefits on average, employees lose jobs, and businesses are broken.
Commenting on potential measures to limit extensions to recovery plans he added: “The overall regulatory framework should focus on managing risks, both for members and shareholders. Focussing too hard on any single element is likely to lead to unintended escalation of risks elsewhere. For instance, a limit to recovery plan lengths will encourage gaming of Technical Provisions and increased investment risk taking. Neither has served DB schemes, members or UK plc well in the past 15 years.”
Commenting on the Government’s consultation on the security and sustainability of defined benefit pension schemes published today, Hugh Nolan, President of the Society of Pension Professionals and Director at Spence & Partners, said:“We welcome today’s Green Paper and the Government’s thoughtful consideration of the issues. Pensions are a long-term investment and we strongly agree that policy should be made calmly and carefully rather than as a knee-jerk reaction to individual problem cases, which are not always a fair reflection of the broader landscape.
“We absolutely share the view expressed in the Green Paper that the ‘main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.’ The SPP believes that the current framework already strikes broadly the right balance between affordability and security, and we look forward to responding with our detailed thoughts on the specific questions raised.
“That said, we are concerned that some employers are really struggling to fund sizeable deficits. The fact that only 13% of DB schemes were still open to new members in 2016, suggests that there is a genuine problem with ‘affordability’, even if most schemes and employers are currently surviving. It is important to maintain regulatory flexibility to support stressed schemes and buy employers the time they need to fund these deficits.”
Comment from John Wilson, Head of Technical, JLT Employee Benefits: “We welcome the publication today of the Government’s much awaited Green Paper on the security and sustainability in defined benefit pension schemes. With the prospect of millennials being the first generation to have worse pensions than their parents, the chance to debate and address the intergenerational unfairness of legacy DB pension schemes is an opportunity not to be missed. However, as the document is very light on details, the Government isn’t giving a clear indication of the direction of travel.
“This means that, more than ever, the pressure will be for all stakeholders, including employers, trustees, members, policy makers and the pensions industry, to act together and explore the options for achieving a lasting DB settlement. The solutions discussed should be in support of all schemes, not just those already in distress. In a recently published whitepaper, JLT Employee Benefits has offered a number of recommendations to achieve what we believe would help to address those DB pension sustainability issues (JLT: How do we get out of this Pensions Black Hole?).
“On consolidation, the paper rejects proposals for the Government to run an arms-length body to consolidate DB schemes, but it seems to encourage the industry to press forward with this. We believe that by consolidating DB pension schemes into mastertrusts, employers could cut costs by £500 million per annum collectively. The £500 million savings would result from a reduction in administration and investment costs, as well as lower actuarial, covenant and legal costs. Simplifying complex benefit structures should also be an area of focus for the industry and policy makers. While the exact savings would be scheme-specific, they could be very beneficial for employers overall.”
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