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Conference Report: Defined benefit diagnosed – next, remedies

The future for UK defined benefit (DB) pension schemes, new regulation for master trusts, a visit from the new pensions minister – all this and more was on the agenda of the national pensions association’s annual conference in late October.

Ashok Gupta, head of the Pensions & Lifetime Savings Association (PLSA) taskforce on the UK’s DB sector, presented an interim report. It provides a thorough diagnosis, with Gupta laying out stark conclusions – the current system is “inefficient”, “not fit for the future” and poses a “significant risk to members’ benefits for all but the most strongly funded schemes”.

Deficit figures have been a lightning rod for much of the scrutiny of DB schemes, but Gupta cautioned against using them as a guide to understanding the problems facing the sector – “big and scary, and wildly fluctuating, as [the deficit figures] may be”.

The PLSA taskforce’s four main findings are: 

• The system is too fragmented;
• The regulatory approach to scheme resolution is inflexible;
• The approach to benefit design and benefit change is too rigid;
• The approach to pension scheme risk-bearing is “sub-optimal”.

The taskforce called for potential solutions to these problems to be investigated, such as scheme consolidation or a more flexible approach to benefit design and benefit changes.

In a panel discussion, Tim Sharp, policy officer in the economics and social affairs department at the Trade Union Congress, the UK’s trade union umbrella association, suggested investigating whether “we can replicate in private sector DB some of the work we’ve seen happening in local government pensions” as a means of achieving economies of scale. Different consolidation models would need to be explored, he said.

Gupta acknowledged asset consolidation as a possible way forward but said “the real win comes if you can also consolidate liabilities”. This, he added, “takes you down the route of benefit flexibility”.

Janet Brown, partner at law firm Sackers and a member of the PLSA DB Council, said the taskforce’s biggest challenge is coming up with recommendations for its final March 2017 report. “If there were a 10-word answer to ‘how do we fix DB?’, it would have been found by now,” she said. 

Important news affecting newer players in the UK pensions market broke during the conference, with the government publishing a bill providing for tighter regulation of master trusts. This involves giving the pensions regulator powers to authorise master trusts based on certain standards being met. 

This came after the PLSA announced it was establishing a committee to promote and defend the master trust model of pension provision.

Opening the conference, Lesley Williams, chair of the PLSA, said master trusts had become a bigger part of the pension market than many would have imagined, as “new breeds” took on millions of new auto-enrolment savers. 

Speaking on a panel, Emma Douglas, head of DC at Legal & General Investment Management, said the bill was intended to create “some fallout”, that it was key for the industry to co-operate “to provide a safety net” to avoid a “messy fallout”.

The publication of the bill’ was generally welcomed, although the uncertainty over capital requirements was condemned by at least one provider.

Morten Nilsson, chief executive at ATP subsidiary NOW: Pensions, criticised the lack of a minimum capital requirement for providers entering the market as a “grave oversight”.

According to Sackers, master trusts will have to meet “financial stability” criteria to be authorised, which means they will have to have “sufficient financial resources” to meet costs of setting up and running a scheme, and to protect members in the event of a closure or winding up. 

“What this means in practice won’t be clear until the regulations are prepared,” says Claire van Rees, partner at Sackers.

Yet again, the devil is in the detail. 

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