“Pushing for recovery plans of less than 10 years for DB schemes is the wrong thing to do. It would force wide scale risk taking tantamount to gambling as well as putting more strain on sponsors who would inevitably be called upon to contribute even more towards deficits. Committing more cash to schemes is unaffordable for many companies. We need healthy sponsors to ensure there’s a good chance of paying benefits to pensioners in full, otherwise we risk more schemes falling into the Pension Protection Fund (PPF) where members lose £45,000 of their benefits on average.
“We should be encouraging schemes to do the opposite: longer-term run off objectives which dial down investment risk. This paves the way for a slow and steady approach to funding. Taking less risk and tackling today’s funding issues over a longer period can deliver much more stable contributions for sponsors, reducing the risks of unexpected cash calls undermining businesses and pensions.
Discussing calls to change the valuation cycle, he added: “We agree that the approach to valuations should change. With the technology that’s available to schemes today it’s anachronistic to rely on data that’s up to three years out of date. Shortening the valuation cycle is the right thing to do. Ongoing monitoring should be the norm to enable schemes to make better decisions around de-risking and improved asset and liability management. Triennial valuations should simply be a three yearly check-up.”
Commenting on the Committee’s recommendation that the forthcoming DB Green Paper consults on ways to allow trustees to propose changes to scheme indexation rules in the interest of members, he added: “Allowing pressure relief valves in some very carefully prescribed circumstances could enable scheme members to still receive a higher pension than they would in the PPF, save jobs and prevent undue strain on the PPF. If such pressure relief valves were to be considered, preventing use by unscrupulous employers would be paramount. The risk of abuse is very high.
“In principle, there are three possibilities:
RPI to CPI over-ride. This would see an end to the current ‘scheme rules lottery’. Some schemes are bound by the wording in their rules to use RPI as the basis for pension increases, while others are free to use CPI. Switching to CPI would improve the affordability of schemes for sponsors. The UK’s combined DB deficit could be reduced by £175bn if all schemes could switch from RPI to CPI for pension increases and revaluation – but this would result in an irreversible reduction in benefits of an average DB scheme member by £20,000.
Pull back to statutory minimum pension increases. This would allow schemes to reduce pension revaluation and increases to the statutory minimum requirement (which is no pension increases at all on pensions accrued prior to 1997). It provides an even bigger release of pressure, and would cut the average scheme member’s benefits by £32,500
Conditional indexation. This would enable schemes in dire straits to stop paying pension increases altogether for a limited time, until scheme funding and business performance recover. It could allow struggling schemes to temporarily stop paying pension increases to help them get back on track while avoiding permanent cuts to members’ pensions. It could be a way to create the breathing space to allow businesses to turn themselves around rather than being pulled down by struggling pension schemes.
The risk of abuse here is high. Preventing use by unscrupulous employers would be paramount. It would need watertight safeguards to be effective. Creating alignment of business and scheme members’ interests would be key to that. For example, the suspension of pension increases should be temporary and with strict restrictions on employers (such as dividend freezes and substantial pension contributions).
“We agree with the report authors, that ‘pension promises’ are just that and any decisions to make changes should not be taken lightly.”
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