Industry hits back at UK proposal for scheme funding requirements

The UK pension fund industry has hit back at government plans to reform funding requirements for defined benefit (DB) schemes, warning that a more prescriptive approach might do “more harm than good”.

The Work and Pensions Select Committee – a cross-party group of MPs from the UK’s lower house of parliament – is conducting an inquiry into the proposals detailed in the government’s white paper on DB reform, published in March.

Among the government’s ideas was “clearer” funding requirements to be set out by the Pensions Regulator (TPR). In a series of submissions to the committee, consultants, actuaries and unions took aim at this central plank of government thinking, suggesting instead that the current system worked well.

The Association of Consulting Actuaries (ACA) said it recognised that the attempt to reduce the complexity of DB valuations to a single metric was a “noble aim”. However, “the unintended consequences will do more harm than good”, the trade body warned.

“The government’s stance in the green paper [published in February 2017] was that DB funding was broadly functioning well, with some exceptions,” the ACA said. “Therefore, any measures should be focused on these exceptions, without destabilising a system which is by-and-large working well.”

In its submission, Lincoln Pensions said that funding crises in some cases had not been the fault of “an inadequate funding framework”.

The covenant risk specialist said: “The solution lies not in creating a ‘minimum funding requirement v2’… but in requiring all pension scheme trustees to fully understand the strength of their employer covenant and to take it into account when determining their investment and funding strategies.

“This could be codified in new legislation… rather than simply in regulatory guidance.”

Consultancy giant Mercer asked why the government wanted to revisit what was “prudent” and “appropriate”, two key measures that would be taken into account when deciding whether the regulator should step in.

“The white paper itself concludes that the scheme funding framework works well on the whole and provides a balance between affordability and employer growth on the one side and funding needs on the other,” Mercer said.

“We agree with this conclusion and do not believe that it would be in the interests of schemes in general, or their members, to review the scheme funding regime in order to deal with shortcomings that only affect a minority.”

Several unions also criticised the proposals to introduce a statutory regime. The Trades Union Congress (TUC), which serves as the UK’s umbrella union organisation, said any statutory funding code risked strengthening “the funding orthodoxy that has led to so many DB schemes closing to new members or even accrual”.

“We would like to see an approach to funding that allows greater investment in return-seeking assets,” the TUC said.

Unite, the UK’s largest union with more than 1.4m members, also expressed reservations.

“A statutory funding code risks enshrining in legislation what is currently just TPR preference – requiring schemes and sponsors to de-risk and plan for buyout (or perhaps consolidation), which will increase the costs for sponsors and will unnecessarily shorten the life of sustainable DB schemes for members,” the union said.

The moves by industry and the unions to nix any potential statutory funding requirement exposed a growing gap in thinking with government and the regulator.

In its submission, TPR said that the current funding regime allowed trustees and sponsoring employers to serve the needs of both the scheme and employer.

However, the regulator added: “[The] lack of clarity in legislation as to what constitutes a ‘prudent’ assessment of liabilities and an ‘appropriate’ recovery plan makes it difficult for TPR to set clear expectations in this complex area, and to take regulatory action where we consider that the flexibility in the funding regime is being abused.

“The onus should be on schemes and sponsoring employers to demonstrate to us how their approach is prudent and appropriate.”

The UK’s biggest pension fund, the £60bn Universities Superannuation Scheme, has been at the centre of a valuation row for nearly a year, after its latest actuarial assessment revealed a significant funding gap. 

This led to proposals to close the DB section of the scheme, triggering strike action from university staff across the UK.

Other valuation calculations produced such a range of outcomes that the scheme’s employers and union formed a joint committee of independent experts to debate the results.