By David Brooks, Technical Director at Broadstone
However, the pensions DB legacy refuses to deal with itself and go away. The link with statutory/sponsoring employers means that when companies change over time (merger/ collapse) the old DB pension scheme is lurking either to make any deal unpalatable to a would be suitor or require some corporate jiggery-pokery to distance themselves from those old obligations (my technical description of pre-pack).
On one hand it shames us (and legislators/ regulators) that companies can still remove themselves from these pension promises. However, on the other hand the costs of those promises has exceeded any estimate at the outset.
Now we have the BHS saga which, is now the subject of a parliamentary inquiry with the result likely to result in “something” happening. I don’t want to try and pre-empt the conclusion of the investigation from tPR into BHS and the more important select committee inquiry. However, a narrative is emerging which highlights two problems:
1. The Pensions Regulator - has it got the teeth it needs? If yes, has it used them effectively and if not should it have them sharpened or some new angry looking dentures?
2. What are we going to do with all these DB schemes?
Answering question 1 is difficult - as the events that have caused some consternation (large dividend payments) happened in the early days of the regulator. However, the 23 year recovery period that was agreed is perhaps more controversial and something tPR will need to be able show it examined and acted reasonably when it accepted. That said tPR do have the powers to overrule recovery plans and it’s recent Annual Statement on funding is clear it expects employers to maintain contributions.
If the inquiry finds that tPR did not use its existing powers effectively we can expect some strong words (change in tPR personnel) instructing these powers are used when necessary. However, if a message needs to be sent to employers that tPR will not roll over then new powers (probably-rehashed and restated existing ones) will be introduced. So, while the legislators fiddle we still have this DB legacy to deal with.
Are we overreacting to BHS?
The PPF seem fairly sanguine about the arrival of the BHS Pension Scheme into the PPF. In the big scheme of things this event is what it plans for and does not seem overly concerned about it. It’s what it’s there for and if the PPF starts to struggle the compensation can be changed to keep it afloat So employers carry on paying what they can balancing between deficit recovery and future investment in their business. However, with this period of low growth and employers struggling, do we owe to those lumbered with these DB schemes to help them out of the drain on their assets and relieve them of their obligations?
PPF Drag
PPF lurks at the centre of our DB galaxy like a black hole slowly sucking those schemes in too weak to resist. Should we consider accelerating this journey and push some schemes in to the PPF earlier? This realises the issue more quickly and could be bad news for members, who would have their benefits restricted earlier, but ultimately reduces the extent of “PPF drift” where the cost to the PPF increases over time. We could establish a ratio by which the schemes least likely to ever make it to control their own destinies are tumbled into the PPF in a controlled manner rather than in panic. I have dubbed this PPF Drag. This would involve re-writing PPF entry rules and some difficult decisions.
Should we just play on while the chaos goes on around us?
Do we carry on in the hope interest rate rises come soon? That is a call for an economist but we could help schemes to reduce the liabilities they have. However, we should consider whether the Government could:
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Say that all DB benefits will increase by CPI - which could save a few billion and link future increases to a more accurate inflation measure. Why should DB members get more just because the luck of the draw when their rules were written
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Increase flexibility in DB schemes - relax the rules (and complications) around triviality exercises from DB schemes. For instance, increase the £30,000 limit, make it scheme specific and remove the 12 month window for any trivial commutations
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Review the advice requirement for transfer values. Increase the limit for statutory advice and increase the visibility of statutory warnings
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Allow pensioners to transfer-out (if it’s good enough for annuities why not DB?)
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Allow DB schemes to pay larger cash sums (taxed over 25%)
What should we do?
My preference is to intially ease the rules on DB benefits, allowing schemes to re-package the benefits they offer their members and provide more flexibility as this will shave some cost off. DB members have been made promises that have proved vastly more valuable than was understood at the time.
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