Defined Benefit Schemes Under Pressure:
Across the UK, 11 million people rely or will rely on private sector DB pension schemes for income in retirement but - despite employers spending £120 billion over the last 10 years in special contributions - deficits have remained at over £400 billion. While most schemes will be able to reach a sustainable funding position by drawing on their resources and the financial strength of their sponsoring employer, this won’t be the case for all schemes. Many employer covenants (i.e. the ability of the employer to meet its obligations) are under pressure and three million members in the weakest schemes only have a 50:50 chance of receiving their full benefits.
Over two-thirds (77%) of employers believe that there are challenges to running DB schemes and the PLSA’s Taskforce has investigated a range of potential options that could help schemes improve their performance and the probability of members seeing their benefits paid in full.
The Taskforce’s report makes three main recommendations:
A new Chair's statement for DB scheme trustees. To encourage schemes to meet the highest standards they would be required to produce an annual Statement to demonstrate that they are operating in line with best practice in areas such as governance, investment performance and cost transparency. This would also provide the cultural impetus for trustees to consider consolidating services, investment or governance where it offers the prospect of improved outcomes for their members.
Making it easier to standardise and simplify benefits. The UK’s 6,000 DB schemes manage tens of thousands of different benefit structures: costly to administer, confusing to members and a barrier to improving efficiency. Whether consolidating or not, schemes would benefit from Government action to make it easier to simplify these structures whilst retaining the full benefits for each member.
Exchanging covenants for funding. The report proposes new measures to help schemes backed by weaker covenants; such schemes could benefit from turning the uncertain promise of future support into tangible funding. In exchange employers would be released from their obligations and schemes could then transfer into newly created Superfunds. Trustees would have a new choice beyond PPF and buy-out. Our research indicates this would be affordable and attractive to many employers and attractive to many trustees (for further information on how a Superfund might work see below or please consult the report).
In order for each of these options to be viable, DWP and industry need to work together to investigate how they could be implemented.
Employer Appetite:
As part of the Taskforce work, employer research was undertaken to ascertain the level of interest in consolidation. Amongst surveyed employers, almost two-thirds (65%) said they would support the principle of consolidation with particular support for shared administration (72%), shared external advisers (66%), shared governance (64%) and pooling assets under one asset manager (54%). The DB Taskforce modelling and analysis suggested that Superfunds would free up member resources and of those businesses who knew what they would invest in should they take this step, 49% of employers said they would invest directly into their employees via benefits and 28% would invest in business growth.
Ashok Gupta, Chair of the PLSA DB Taskforce, commented:“More than 11 million people rely on Defined Benefit pension schemes for some or all of their retirement income but there is a real possibility that without change we will see more high profile company failures such as BHS or Tata Steel. It is vital that action is taken to address covenant risk, underfunding and the current lack of scale in the majority of schemes.
“Our proposals have the potential to transform the industry – helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses. The industry and government need to grasp this opportunity and tackle serious flaws that threaten the security of people’s retirement.”
Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association, said: “We asked the Taskforce to be bold and challenge commonly-held perceptions. Today’s report is proof that they have done just that. The UK’s 6,000 DB schemes face 6,000 different challenges and the Taskforce’s proposals create new options to tackle each of them.
“Consolidation can benefit a variety of schemes and their members but there are some key challenges for those who want to pursue this option. The new DB Chair’s statement and the ability to consider simplifying benefit structures have the potential to help these schemes by removing some of these barriers and allowing them take proactive steps to manage their deficits.
“The Taskforce’s analysis of a potential Superfund framework moves forward significantly the case for considering how employers can be enabled to swap covenants for cash. We call on industry and the Government to work with us to further develop and test this framework.”
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