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Long term sustainability of defined benefit (DB) schemes

Both the Confederation of British Industry (‘CBI’) and the Pension and Lifetime Savings Association (‘PLSA’) have recently published reports looking at what can be done to help employers manage the real cost of DB schemes.

In the CBI’s policy briefing paper, they remind us that pension schemes are long term

“in pure cash terms, UK defined benefit is actually relatively well-funded. These schemes have well over £1tn of assets to meet future liabilities. It is worth remembering this, and the fact that liabilities fall over many decades, when presented with headlines about the latest movement of deficits in a month, driven by changes in the gilt rate.”

Recognising the problems facing DB schemes, the CBI calls for

1. flexibility in funding plans with an effective regulatory system,
2. modernising inflation indexation,
3. addressing the negative spiral created by a ‘gilts plus’ approach to valuing schemes and
4. unlocking pension scheme investment in more liquid assets, including infrastructure.

In the PLSA DB taskforce’s Interim Report, they state that DB schemes are under severe pressure and that without change the likely outcome will be hardship for members and employers. Their findings and recommendations include:

1. The current system is too fragmented. Work should be undertaken to investigate the potential for scheme consolidation, which could help secure more economically viable schemes better able to deliver value to scheme members and their sponsors.
2. The current regulatory approach to scheme resolution is inflexible. Work should be undertaken to investigate how changes to the system could deliver better solutions to scheme resolution and remove regulation that adds cost but has little or no tangible benefit.
3. The current approach to benefit design and benefit change is rigid. Work should be undertaken to investigate how a more flexible approach to benefit design could be implemented to help sustain schemes.
4. The current approach to pension scheme risk bearing is sub-optimal. Work should be undertaken to develop better measures of benefit risk.

Pension freedoms

According to figures reported to HMRC, since the new pension freedoms were introduced in April 2015 over 475,000 individuals have received flexible benefits, totalling £6.75bn.

Flexible payments include for example, flexi-access drawdown arrangements (taxed as income) and lump sum payments known as uncrystallised fund lump sum benefits for which 75% of the payment is taxed as income.

In a separate report, the Department of Work and Pensions shared research covering customers experiences of using Pension Wise, which was set up to provide guidance to individuals wishing to exercise their pension freedoms. Headlines include:

• 91% of customers were satisfied
• 94% of customers who attended appointments said that they were likely to recommend the service to others and
• 85% of customers felt that their understanding of their options improved as a result of using the Pension Wise service.

Please contact your usual First Actuarial consultant if you would like to discuss anything contained in this bulletin. Alternatively, you can find more information on our website First Actuarial.

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