CDC sails through
Today the Pension Schemes Bill will continue its reading in committee stage in the House of Commons. In sharp contrast to by its last outing in the Lords, we saw no fireworks- and certainly not the conflagration threatened 415 years ago. You can hear the debate on CDC schemes yesterday from this link
The amendment to protect professional advisers from Criminal Prosecution for poor advice was thrown out at the very end of the proceedings
There may be trouble ahead
Although yesterday’s debate was placid and consensual, debates on other parts of the Bill are likely to be more fiery, as one of the speakers hinted at yesterday
This blog has been reporting discontent with the direction of travel suggested by the Pension Regulator’s consultation on the DB funding code and this reached the popular press yesterday. The Thunderer rolled out one of its big guns yesterday and here’s an exert of Patrick Hosking’s article in the Times yesterday.
Proposed pensions laws ‘pose threat’ to schemes
Traditional pension schemes still open to new members are warning that legislation working its way through parliament could lead to a blowout in their deficits and may even force them to close.
A group of mostly unnamed defined-benefit schemes under the auspices of the Pensions and Lifetime Savings Association has calculated that the impact could be to worsen their financial situation by between £120 billion and £160 billion.
The funds together have six million members and £370 billion of assets.
One scheme prepared to go public, the Railways Pension Scheme, believes that the legislation as presently drafted could force it to drastically change its investment mix, which would produce an aggregate £15 billion shortfall in its funding arrangements.
Schemes open to new members fear that they will be treated in the same way as schemes closed to new members and will be forced to “de-risk” their portfolios, condemning themselves to much lower investment returns in future.
In practice, they can afford to be more adventurous in their choice of investments because they are receiving new contributions from employers and young employees and do not have an end-date by which every last penny of promised pension must be paid out.
However, critics claim that the Pension Schemes Bill fails to recognise this distinction and unless amended will encourage the Pensions Regulator to take a more hawkish approach to all.
Baroness Altmann, a former Conservative pensions minister, said: “This really is a serious issue. The current pressure on pension schemes to de-risk is an existential danger to remaining open defined-benefit members.”
Russell Mears, a senior pensions industry figure who is advising the railways scheme, said:
“We’re concerned about the unintended consequences. In the case of the railways scheme, it could lead to an increase in technical provisions of more than £15 billion, as well as significant increases in the future cost of accrual.”
While defined-benefit schemes still open to new members are rare now in the private sector, they are common elsewhere and include council schemes
The Railways Pension Scheme submits evidence.
I am pleased to hear not just that the Railway Pension Scheme has submitted its evidence but that this evidence is likely to be published by Parliament (and will appear here when it is).
The Financial Times also reports that 0pen defined benefit schemes could see their liabilities increase between £120bn and £160bn due to the new funding rules proposed by the Pensions Regulator.
The warning was made by the £30bn Railways Pension Scheme in written evidence to the House of Commons Public Bill Committee on the pension schemes bill, urging the government to retain an amendment to Clause 123 to make provision for open schemes to be treated differently to closed schemes.
The issue at heart is TPR’s new DB funding code, which proposed a twin-track DB funding approach that aims to reduce average scheme dependency on sponsoring employers.
The Railways Pension Scheme stated that the current regime allows open schemes to invest in a way that reflects their particular characteristics.
Under TPR’s proposals, “there would be significant additional (and unnecessary) costs” imposed on open schemes as they “would be forced into following the approach suited to closed schemes that delivers lower returns to members”.
Considering that no economic assessment of the new rules has been made, the Railways Pension Scheme conducted research with a cohort of open schemes — which represent an aggregate DB membership of 6m people with assets of around £370bn — concluding that these pension fund liabilities could rise up to £160bn.
“Companies will be forced to move billions of pounds unnecessarily from productive investment in their businesses to their pension funds,” the document read.
“This will reduce tax take, and damage the long-term health of the UK economy as a whole, just as the country recovers from Covid-19.”
The Railways Pension Scheme, which alone will see its liabilities increase to £15bn, stated that “open schemes will become unaffordable, leading to the premature closure of otherwise healthy schemes, contrary to government policy”.
“It will have a profoundly detrimental impact on more than 2m existing members of such schemes,” it added.
Railways pension fund officials are therefore asking the government to retain the Bowles amendment (123) passed in the House of Lords in the summer — that would ensure that open DB schemes are not forced to de-risk their investments in the same way as closed plans — which pensions minister Guy Opperman has moved to be withdrawn.
If that is not possible, the scheme has proposed its own amendment, which “provides the crucial protection that open schemes need without being too restrictive on the regulator”.
You can listen the debate today which should include the most contentious extension of the Pension Regulator’s Powers here (the session starts at 11.30)