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Special Report

ESG: The metrics jigsaw


A thin regulatory line

Back in the 1990s, the UK created a Child Support Agency, whose objective was to ensure errant fathers and mothers pay due financial maintenance to estranged offspring. Enforcing these obligations has not been a success and government now classes three-quarters of the £3.9bn (€5bn) in cumulative outstanding child maintenance arrears as irrecoverable.

How serious is the UK’s £300bn aggregate defined benefit (DB) pension deficit and how recoverable is it? The base assumption is that the problem will dissipate as markets and yields  revert to the mean. A buoyant economy will mean healthy sponsors can comfortably meet their obligations over time.

Low interest rates are often still discussed as if they are a temporary phenomenon. Yet few think yields will quickly revert to historical levels, or that pressure on pension funding will painlessly disappear. 

Instead, there has been a growing realisation that the uncertain recovery in the Western world may involve persistent low growth. Even if negative rates do not persist, lower-for-longer rates look probable scenario.

This has important implications for underfunded defined benefit (DB) pension schemes in the Netherlands and the UK, where extended recovery periods have been a feature.

Institutions like the OECD are increasingly concerned about the ability of pension funds and insurers to keep their promises in the longer term. In certain exceptional cases, they might need to renegotiate or adjust existing promises. Yet in the UK there is no legal mechanism to do this without recourse to the Pension Protection Fund (PPF).

The ailing remnants of British Steel and the insolvency of the retailer BHS highlight the woes of the UK DB sector, even if the eye-catching (proposed, although never agreed) 23-year recovery plan for the BHS scheme was a clear anomaly. 

TPR’s original duties were to protect benefits, promote good administration and to reduce risk to the PPF. To those three have since been added a duty to ensure compliance with auto-enrolment (added in 2008) and to ensure the “sustainable growth” of sponsoring companies (in 2014).

TPR’s pragmatic, business-friendly mandate makes sense, so long as everyone plays by the rules; in practice, TPR lacks the resources to ensure full compliance with the letter and the spirit of funding requirements. 

In fact, FTSE 350-listed DB sponsors are paying more in dividends now but are not making a commensurate increase in deficit reductions; the ratio of contributions to dividend payments has decreased from 17% to 10% over the past six years, according to TPR.

No-one is saying the UK’s TPR is doing its job badly, but a sensible analysis suggests it needs to do a materially different job to the one Parliament has given it.

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