UK - Employers in the UK should be given incentives to sponsor defined benefit (DB) schemes, and it is a popular delusion that such schemes are too expensive, according to a new pensions paper.

Con Keating, head of research at Brighton Rock Group, said: "A society with deferred pay is more civilised than one without. It is time to restore the incentives for employers to sponsor defined benefit pensions schemes."

In his new paper - entitled 'Don't stop believing: The state and future of UK occupational pensions' - Keating said it was time to rewrite regulation to accommodate and encourage such forms of pension provision.

"It is now widely believed that defined benefit pensions are unaffordably expensive; this is a popular delusion, though widely encouraged by those with profitable vested interests," he said.

His paper offered evidence that these beliefs were misguided, and that workplace DB pensions were affordable at both state and private sector levels, he said.

Keating also argued against current hedging practices within pension schemes, saying scheme risks should be seen in combination with the risks faced by the sponsor.

"Through their role as the balance-of-cost underwriter of DB pension schemes, sponsors do face the risks inherent in their schemes, such as inflation and longevity," he said.

"However, they also face these risks and their consequences in their commercial activities - any hedging should, if desired, be conducted by them in this context, not by an isolated pension scheme."

Trustees were encouraged to consider many risks such as longevity, inflation and interest rates or discount functions, he said, and to go to great expense to mitigate these risks, as reinforced by regulation.

"The reality is that an occupational defined benefit scheme faces just one risk - sponsor insolvency," Keating said.

This risk was the "genuine occupational problem", and it could not be solved by any kind of regulation based on scheme funding, without incurring excessive cost, he argued.
Instead, insurance is the answer, he said.

"As demonstrated in this paper, it can be solved efficiently by pension indemnity assurance, encompassing even entirely unfunded schemes," he said.

This is not an academic solution, Keating said, pointing to the Swedish pension system in which pension indemnity assurance, even for unfunded schemes, has played a significant part for more than 50 years.

Detailing inadequacies of pensions regulation in the UK over the last few decades, Keating said the effect of the new regulation had been to raise the cost of providing DB pensions without making much difference to the security of scheme members.

"Most schemes will be underfunded at sponsor insolvency, and members will receive only the reduced benefits of the Pension Protection Fund - and the long-term future prospects of that are suspect," he said.

In a section of the paper, Jan Ahlström, chief executive at Swedish pension indemnity assurer PRI Pensionsgaranti, says that while the paper's conclusions generally agreed with his organisation's experience, the Swedish system was not wholly comparable with the theoretical model.

"We do not believe the unfunded system is a one-stop shop solution that can be used everywhere," he says.

"Our view is that a strong pension system offers a variety of financing solutions simply because companies' conditions and situations differ."