In an article in FTfm this morning , Guillaume Prache, MD of Better Finance (a EU wide organisation representing savers) claims that EU Governments have deliberately chosen to sacrifice the financial security of pension savers in favour of artificial negative interests and Government backed bond buying programmers which have pushed up the cost of paying pensions and reduced the means to do so.
The impact of QE on pension schemes is well known. Baroness Altmann has thundered on about this for the best part of a decade, but the next six months are likely to see the strain on Europe’s defined benefit pension system increase further.
The FT’s new global head of pensions Jo Cumbo reports on a story closer to home. The Pensions Regulator is looking into up to 200 cases where UK DB sponsoring employers have gone on a “payment holiday” to ease corporate cash-flow over the furlough period.
They did so with the reluctant consent of TPR and David Fairs is now telling Cumbo TPR is set to go further than its June advice where it asked trustees to question sponsors. Where TPR finds contributions have been suspended inappropriately, sponsors may be asked to make good the contributions missing from the recovery plan.
Protecting members or the PPF?
The priorities are desperately difficult to assess. Pension schemes must be properly funded, but on what measure?
Can it be in the interests of members that the company fails for the sake of funding to the Regulator’s requirements?
For members who are still in the employ of the sponsor, the issue is even more acute, they face losing both a proportion of their pension and their job.
Meanwhile the competitive positions of sponsoring employers who have set up pension schemes for their staff are compromised relative to newer rivals for whom the only liability is the payment of defined contributions under the funding rules of auto-enrolment.
Pension support in short supply
So sponsors of defined benefit pension schemes have every right to feel persecuted. They can point out that the fundamental cause of their pension scheme’s impoverishment is not of their, but the Government’s making. But the persecution they receive is from the Government’s pension regulator.
The circumstances of the pandemic cannot be blamed on Government, but the means to mitigate the impact of the acute pension problems facing sponsors is in Governmental hands.
And while this crisis plays out, the Government must consider responses to TPR’s proposals set out in the new DB funding code.
If the consultation responses published on this blog are representative of the bulk of TPR’s reading, it looks as if the public mood is in favour of a relaxation rather than a strengthening of the rules surrounding DB pension funding.
Pension support is indeed in short supply. While no-one wants to see dividend payments being retained while pension payments dry-up, we do not want to see employers ceasing to employ and working people finding themselves struggling on benefits to ensure others’ pensions are secure.
For this is increasingly the case. The societal issue of DB pensions is that pension security is primarily increasing, the older you get. Most pension liabilities pertain to people no longer in the sponsor’s employment and sponsors feel increasingly disassociated from the payment of future pensions as they are to other people’s staff.
There is no easy answer to these problems. But tying yourself to a funding code as inflexible as that put forward in March, does not seem the most sensible of policy decisions. Certainly not a policy decision to be taken during the second wave of a pandemic.
The proposed new Code is very much more about protecting the PPF rather than members but the loss experience of the PPF is trivial when compared with the good that DB pensions have done and are doing. The proposed Code should be scrapped and TPR should consider the question of how to encourage the provision og high quality pensions now and far into the future,