To truly enable open defined benefit (“DB”) schemes to thrive we first need to agree on what we mean by the word “thrive”.
If thriving is being able to meet benefit promises for members, then the current regulatory regime that has been built up over time has certainly been successful in improving funding levels, reducing levels of investment risk and the chance that members will suffer any reduction. But it has also made the cost and risks of DB schemes becoming unattractive to sponsors, resulting in the closure of most private sector DB schemes to new members.
Instead, if thriving is about increasing the membership and number of open DB schemes, then the current regulatory regime is not aligned with this objective. Changes to the existing regulations could combat the reduction in active membership by reducing the cost of providing and underwriting new DB pension promises.
Adapt to survive… and thrive
Specifically, changes could be made to reduce the cost of funding open DB schemes. For example, the new funding code could carve out genuinely open schemes or make it possible for longer covenant reliability periods and extended periods until reaching significant maturity for open schemes with stronger covenants. Changes could also reduce the requirements on future DB benefits, for example by removing the need for a minimum level of pension increases.
More significant regulatory changes would be required to incentivise sponsors to re-open or introduce DB schemes. It is more likely that regulatory changes to support multi-employer CDC schemes would be a more realistic aim for a “thriving” pensions system in the UK that delivers good value for stakeholders and good outcomes for members.
In detail – Isio’s view on buyouts:
There has been insufficient capacity in the buy-out market for some years, especially for smaller schemes, with only three or four insurers writing business at this end of the market and only when there is a lull in larger deals. The restriction is one of specialist resource rather than capital availability so only schemes who are ‘certain’ to afford buy-out are likely to be entertained.
To improve the certainty of affordability for all deal sizes, widespread introduction of deferred premiums would be beneficial. It would be particularly beneficial if the regulations were changed to allow these deals to be structured so trustees, backed by sponsors, could take loans with the buy-in insurer, secured on the buy-in policy purchased, hence enabling attractive rates due to the security of collateral.
In detail – Isio’s view on consolidation:
The size of DB scheme that someone is a member of should not be a driver of the quality of member experience and outcome.
However, it is clear that larger DB schemes have the scale to deliver governance that is more best practice than minimal compliance.
As the burden of compliance continues to rise with further regulation and focus on improving quality, with the associated costs falling disproportionately on smaller schemes, we believe that making consolidation easier for sponsors and trustees should be encouraged. One way of doing this would be to make the superfund gateway tests simpler to comply with. Irrespective of any changes, we would also encourage improving knowledge amongst trustees and sponsors of the various consolidation options that are available.
In detail – Isio’s view on pension provision trends:
Improvements in DB funding levels will accelerate the transfer to insurance, result in relatively lower levels of investment risk being taken and may help some schemes afford to stay open longer. The position of public sector, mainly DB, and private sector, mainly DC, pension provision will continue to diverge.
While private sector DB pension provision will continue to reduce, we are supportive of the development of multi-employer CDC arrangements, which we believe can provide better outcomes for members compared to DC schemes with equivalent contribution rates.
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