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PLSA taskforce urges action to fix 'inefficient' UK defined benefit system

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An industry taskforce investigating defined benefit (DB) pension funds in the UK has pointed to consolidation and a more flexible approach to benefit changes and scheme resolution as potential remedies for a system it says is not “fit for the future”.

The taskforce was created in March this year.

Announcing its interim report at the Pensions and Lifetime Savings Association (PLSA) annual conference in Liverpool today, Ashok Gupta, chair of the group, said: “The current state of DB poses a significant risk to members’ benefits for all but the most strongly funded schemes.”

He suggested the current system was a risk to the wider economy and a burden on people outside DB schemes.

He added that, in 2015, companies paid around £31bn (€35bn) into their DB schemes, with £11bn of this serving as deficit-recovery contributions.

“That money could have been spent elsewhere in their businesses – for example, on wages, business investment, dividends or pension contributions to employees in DC schemes,” he said.

He said it was “time to act” because the current system “is not fit for the future”, and its inefficiency is affecting scheme members, sponsors and even more people outside those schemes.

The taskforce has come up with four main findings:

  • 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”

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

Joanne Segars, chief executive at the PLSA, said the taskforce’s work had helped quantify the scale of what was already a known problem for DB schemes.

“The system we have is not working as well as it could – it is inflexible and costly,” she said. “It only allows for binary outcomes of complete success or complete failure.”

The next phase of work for the taskforce will be to collaborate across the pensions and investment sector with the government, regulators, social partners and industry to develop recommendations to support the sustainability of DB pensions.

Its final report is to be published in March 2017.

The state and future of DB pension schemes is a hot topic at the moment as a result of high-profile insolvencies and the impact on deficits from low Gilt yields, with the UK work and pensions select committee’s related inquiries into BHS and wider DB pension regulation keeping the matter high on the agenda.

The new UK pensions minister Richard Harrington yesterday told delegates at the PLSA annual conference in Liverpool that the government would soon be launching a consultation – a Green Paper – on DB pension schemes.

Consolidation was one of the measures he flagged as a possible way of dealing with some of the problems the sector faces.

Not everyone agrees, however, that there is a DB affordability crisis.

The executive director at The Pensions Regulator recently said talk thereof was overblown and that the pension fund deficit figures often reported in the media were misleading.

Earlier this week, the deputy governor of the Bank of England is reported to have told the work and pensions select committee that the central bank’s quantitative easing policy was not materially harming businesses with DB pension schemes. 

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