Many UK workers will not receive their full defined benefit (DB) pension in full as their employer will go bankrupt before their scheme reaches full funding, according to a new report from the Pensions Institute.
The institute – part of the Cass Business School in London – said the government needs to recognise this danger and shift pension policy accordingly.
“As highlighted by the BHS and Tata Steel cases, many DB pension scheme sponsors could collapse under the current policy which obliges scheme sponsors to adhere to the binary outcomes of either ensuring schemes can pay benefits in full or risk leaving the scheme underfunded if the sponsoring company goes bust,” the institute said.
It called for a policy of “second best outcomes” to provide more scope for DB schemes to pay benefits at a lower level than originally promised, but higher than privided by the Pension Protection Fund (PPF).
David Blake, director of the Pensions Institute, said: “The difference between the potential value of negotiated benefits and PPF benefits represents a significant loss to members, sponsor organisations, PPF levy payers, and society as a whole. Instead, seeking ‘the greatest good for the greatest number’ would prevent the destruction of billions of pounds in economic value. It would also produce a more equitable distribution of benefits for younger members who stand to lose much more on insolvency because of the way PPF benefits are calculated. But fortunately, we find that most companies can afford to make their pension contributions.”
The institute’s report agreed with the government’s assertion that there was no affordability crisis across the DB sector in the UK, as stated in the Department for Work and Pensions’ green paper earlier this year.
However, it argued that the government “should establish a statutory minimum contribution rate for all sponsors with schemes in PPF deficit”, except where this would threaten a company’s solvency. It also called for a streamlined process for the regulated apportionment arrangments that have been used in recent cases involving stressed schemes and sponsors.
The full report is available here.
Government shelves pension reforms
It appears the government has pushed reviews of pension policy off its immediate agenda.
Yesterday morning saw Queen Elizabeth II give her traditional speech to the UK parliament, which is written by the government and outlines its policy agenda. Despite manifesto promises from the Conservative Party, there was no mention of changes to the state pension or of measures designed to follow through on any of the areas covered by the government’s DB green paper.
Jeremy May, PwC’s UK pensions leader, said: “This suggests that at least the initial evolution of the next stage of pensions regulation will be based within the existing legislative framework.”
Regulator rules on DB transfers
The Financial Conduct Authority (FCA) has set out new rules for advice on transferring out of a DB scheme.
The number of people requesting “transfer values” and exiting DB schemes to move to defined contribution (DC) schemes has risen sharply in the past two years due to the “pension freedoms” introduced by former UK chancellor George Osborne. These allow DC scheme members to choose what to do with their pension savings at retirement, rather than being forced to buy an annuity.
In addition, offering “enhanced transfer values” has been seen as a viable part of a wider derisking strategy, as it allows funds to offload liabilities as well as assets.
The FCA yesterday proposed rules requiring transfer advice to be provided as “a personal recommendation”. The regulator also wants providers to give members a clear picture of their transfer value and what it would mean to gove up a DB guaranteed.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Defined benefit pensions, and other safeguarded benefits such as guarantees, are valuable so most consumers will be best advised to keep them. However, we recognise that the environment has changed significantly, so we want to ensure that financial advice considers the customer’s circumstances in full and recognises the various options now available to them.
James Walsh, EU and international policy lead at the PLSA, said providing a clear picture was key to the project’s success.
“Defined benefit pensions provide scheme members with a guaranteed income for life – irrespective of how long their retirement might be. Therefore, it is essential that this guarantee is not given up without serious consideration and that appropriate financial advice is taken before any decisions are made,” Walsh said.