It was there in the title “Security and Sustainability in Defined Benefit Pension Schemes”. This wasn’t going to be radical, this would be polysyllabic and it would focus on getting pensions paid.

The Government’s green paper is a state of the nation address to its public- the pension professionals – on the state of health of our defined benefit pensions. The introduction , which runs to 137 paragraphs over 36 pensions concludes

It is not straightforward to identify a clearly defined segment of schemes or employers that would warrant targeted policy intervention, based on funding strength and member security.

This is the essential message of the paper as a whole. Though it looks at changes in four areas, the authors find it hard to come to firm conclusions in any.

The four areas are

• Funding and Investment
• Employer Contributions and Affordability
• Member Protection
• Consolidation of Schemes.

Yesterday I set out my stall and my measures of success for the paper;

1. NO DUMBING DOWN on existing promises..
2. NO ENFORCED CONSOLIDATION of small schemes.
3. YES TO  MORE PRODUCTIVE ASSETS.
4. YES TO A GREATER PROPORTION OF GROWTH ASSETS.
5. YES to CDC!   

My sceptical friend, wrote me – “you’ll get 0/5”. He was wrong. By my own measure I was disappointed only in the paper’s failure to look at DB without guarantees (or DC with a targeted benefit).

No Dumbing Down

When it comes to existing benefits, the paper concedes that in cases where schemes can be proved to be “stressed”, an override could be applied that changed the benefit indexation from RPI to CPI. This is no small matter, it could wipe up to £90bn off the DC liabilities, reducing the overall deficit between assets and liabilities by up to 40%.

But the tone of the paper is deeply sceptical about how stressed schemes could be identified and the conflicts between the employer, trustee and PPF. It may be a “hit” for the de-riskers, but it is not a “palpable hit”.

The step to “conditional indexation”, where the scheme chooses to suspend indexation altogether , is discussed but whatever answer it is looking for, appears to be in the long-grass.  The paper leaves the door ajar, but puts existing benefit reductions in a “special pleading” corridor of uncertainty.

No enforced consolidation

This paper is no fan of the PLSA’s proposals to force small into big. It points out that the segment of schemes under £100m by assets , is the best funded of all DB segments. It accepts that smaller schemes are relatively inefficient but does not accept that that inefficiency can be eradicated to the salvation of overall solvency.

The paper rightly points to problems with existing multi-employer DB schemes and while it suggests these might be eased, it is hardly doing handstands and singing hallelujahs when it contemplates the practicalities of consolidating schemes. The DWP has listened to the practitioners who look after such schemes and is (like us) deeply sceptical.

Yes to more productive assets

The paper proposes  industry-organised superfunds into which small schemes could invest (let’s say for growth or for matching).

This is a challenge for the Investment Association , who are watching the LGPS organise itself around such funds.

It is the right solution. The DWP are being smart in distancing the PPF from the management of such funds.

If we are serious about adding value, and if we take the recommendations of the FCA’s Asset Management Market Study seriously, then we (the pensions industry), will find a way to operate asset pools that give all schemes access to more productive assets.

I look forward to seeing the various proposals for the management of these pools. I suspect that the tigers will run around the tree so fast in search of the “little coloured fellow” that they will turn into a pool of butter. Hopefully, good sense will prevail and (with some help from above) we will see large pools emerge that will make the life of small and large scheme trustees, a lot simpler (and productive).

As Jo Cumbo commented, this is the most interesting theme of the paper.

Yes to a greater proportion of growth assets

It was good to see the DWP acknowledge the impact of the FABI index on the argument. Our position has never been to compel schemes to use best estimate valuations but to restore the balance so that the rewards of investing for growth are reflected in valuations.

In a masterpiece of syntactical complexity , the paper opines that it does not find the Regulator’s position on discount rates is having a perverse impact on the investment of scheme assets. The DWP is right, but the damage that has been done over the past ten years, has been partially as a result of tPR pressure and the impact of the PPF levy on schemes that dare to invest for the long-term.

I suspect that the authors of this report recognise this, but this is not the forum for such introspection, we see the paper tipping it’s hat to growth – that is all we can expect.

Yes to CDC

The paper has been criticised for bottling it (a missed opportunity) and in its failure to promote the unfinished business of CDC, I would agree with this criticism. For schemes that want to stay open to future accrual, the opportunity to accrue without fear of being on the hook for extra contributions to meet guarantees would be greatly welcome.

We are in the chicken and egg position of having no large scheme prepared to accept the risk of operating a  non guaranteed accrual on a DC basis and the DWP not proceeding until they see a large employer taking that risk. The risk of a class action is from common law, the DWP cannot control common law- we need precedents – you can see the circularity and the frustration.

A necessarily boring paper

Many people will see circularity and frustration in this paper. I am not one of them. It is long and difficult and tortuously written (in places), but it is a good and necessary paper which at least puts down a marker in the sand.

DB is under threat , not so much from without as within, this paper reduces the threat through its careful and thoughtful arguments.