Commenting on today's Green Paper on defined benefit pension schemes, Raj Mody, PwC's global head of pensions said:"Today's Green Paper gives some hope to many employers who have struggled with the rising cost of their defined benefit schemes and want to put them on a firm footing.
"For many schemes, pension increases far outstrip modern inflation measures, due in part to the lottery of how they were set up and layer upon layer of subsequent legislation. Allowing these to be eased in cases of distress is sensible. Our Skyval index showed that UK pension deficits were around £470bn at the start of February. Depending on the extent of the easement allowed, this could be reduced significantly by the measures suggested.
"Other suggestions in the Green Paper, such as improving the efficiency of regular funding valuations are also timely, particularly as the ability to use technology to manage pensions risk has evolved significantly since current legislation was written.
"However, we should not overestimate what a Green Paper by itself is designed to achieve. It is mostly at this stage exploratory, and asks more questions than it provides answers or definitive conclusions. It will take some time for the ideas in the Green Paper to be developed into detailed proposals, agreed, and then come into law. But it is encouraging that the Government is willing to enter into a wide ranging debate on the issues."
Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association, said: “The Green Paper asks the questions necessary to move forward the increasingly pressing debate about the future of defined benefit pensions in the UK. The interim report published by our DB Taskforce last year identified how the challenges facing DB are posing a material risk to members’ benefits, to employers and the wider economy.
“We firmly support the Government’s desire to explore consolidation as a way to secure the defined benefit pensions of millions of savers. The DB Taskforce’s next report, to be published in March, will look at consolidation in more detail.”
A copy of the PLSA DB Taskforce Interim Report can be found on our website here. The Taskforce’s next report will be presented on 9 March at the PLSA Investment Conference in Edinburgh by Ashok Gupta.
Kate Smith, Head of Pensions at Aegon, comments on the of the Defined Benefits Green Paper, published by the DWP today. “Some Defined Benefit schemes are feeling the pain and this isn’t being helped by historically low interest rates of 0.25% and increasing longevity. The Green Paper is looking to allow struggling employers with stressed schemes to link pension increases to the lower CPI, rather than the RPI. Pension indexation tends to be ‘hard-wired ‘ to the RPI in 75% of schemes rules, which means that it’s nigh on impossible for employers to change to the lower CPI index, without government intervention. Although moving to CPI indexation will reduce employer’s costs it will also cut pensioners’ future benefits. To avoid a moral hazard we strongly believe that employers / trustees should only be allowed to cut future pension increases if the sponsoring employer and their scheme meet stringent requirements set out in legislation, with each case approved by the Pension Regulator.
“To illustrate the effect on members, if a scheme were currently granting uncapped RPI increases, pensioners would be receiving annual increases of 2.6% while a move to CPI would reduce that to 1.8%. A difference of 0.8% might look small but over time, it can become substantial. If these rates continued, someone with a starting pension of £10,000 would under uncapped RPI have a pension of £16,708 after 20 years whereas under CPI, this would be only £14,287. After 30 years, which is now not an exceptional period of retirement, the difference would have grown to over £4,500 a year. This shows that changing the inflation index is not just a technicality and mustn’t be undertaken lightly.”
Nick Griggs, Partner and Head of Corporate Consulting at Barnett Waddingham LLP, says: “An open defined benefit (DB) scheme is now so rare perhaps, in the words of Indiana Jones, it belongs in a museum. The environment, which these schemes were set up, was very different to today and like everything else, DB must adapt to survive. We welcome the Government’s attempt to engage with the industry which wishes to restore some flexibility to the system but fear history will show this to be too little too late.
“I would agree the current level of contributions required to fund DB schemes can in theory be paid by most employers without risking insolvency. However, for a significant number it is having a big impact on their future investment plans and the amount employers are doing to support current employees in saving for their retirement. It is in society’s interest that employers can tackle these two areas. Therefore, I still think the Government should be exploring a mechanism, which would allow employers to reduce the benefits, in appropriate circumstances, to be paid. Allowing a lower level of pension increase to be paid in future is the obvious area to explore.
“Consolidation of defined benefit schemes is a nice idea in theory, but impractical without regulation making it easier to simplify and standardise the benefits offered by different schemes. Unrelated sponsors have little incentive to get into bed with each other. For example, small businesses paying into the plumbing industry pension scheme face significant financial burden when employees reach the end of their working lives. Considering just pooling of assets or advisors has its difficulties, including set-up costs and the flexibility that would be lost in exchange for the associated cost saving.”
|
