The DWP is in an awkward spot over the funding of defined benefit pensions. The 130 responses to its regulator’s consultation paper are likely to be making uncomfortable reading to those scrutinizing them in Brighton and the Pensions Minister is hearing on all sides that the DB funding code , far from protecting DB schemes, could so undermine the sponsor covenants as to risk losing retirement income and current jobs.
For a minister for “work” and “pensions” , the messaging is pretty grim. Having listened to the audio and now read some of the Hansard transcripts of the Committee stages of the reading of the Pension Schemes Bill, DB funding is the one area about which Guy Opperman appears defensive.
Even before the debate on the Pension Regulator’s powers, the Pension Minister was keen to let MPs know he was not introducing CDC as a Trojan Horse to sack DB schemes.
We will debate DB schemes, which I think have a great future. We have gone to great efforts to support the future of DB schemes.
This is an alternative way forward that some organisations—Royal Mail is the classic example, but there are others who are looking at this—will welcome. Under no circumstances should it be implied or in any way taken that the Government will do anything other than support DB schemes on an ongoing basis.
He opened his arguments for ruling out the Bowles amendment thus
We do not want good schemes to close unnecessarily, or to introduce a one-size-fits-all regime that forces immature schemes with strong sponsors into an inappropriate de-risking journey.
Opperman continued to acknowledge the risk of the one size fits all strategy (termed fast-track by TPR)
Open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey.
Opperman tried hard to give assurance that the proposals within the DB funding code would do just that. MPs were asked to accept that they would be giving tPR powers to enforce secondary legislation which were it to follow the proposals in the Code , would put such strain on DB sponsors as to imperil both work and pensions.
I make it clear that the Government can commit to using the regulation-making powers available to ensure that the secondary legislation works in a way that does not prevent appropriate open schemes from investing in riskier investments where there are potentially higher returns as long as the risks being taken can be supported and members’ benefits and the Pension Protection Fund are effectively protected.
This would sound more credible if the conciliatory tone was shared by the Pensions Regulator, but recent pronouncements from David Fairs and Charles Counsell do not acknowledge the need to move from the “scorched earth” proposals of the code.
I hope that the Pensions Regulator will be reading the Minister’s statements and recognizing they cannot have their code which eats what it seeks to protect.
I say this because the Pensions Regulator (through the aforementioned spokespeople) has relied for its positioning , not on what the pensions industry wants, but what parliament wants.
What does parliament want?
On most subjects in the Pension Schemes Bill, there is cross party support for the Government’s position, but with regards clause 123 of the Bill, which seeks to offer open pension schemes a carve-out from the DB code, there is not. Here is the position of the SNP put succinctly by Neil Gray
There is a problem with encouraging good open schemes to de-risk. We know where the bond market and gilts market is right now; we know that that puts them at risk. Baroness Altmann has intervened this week to say:
“If you decide to ‘de-risk’, then you are also deciding to ‘de-return’, taking away the upside potential that is so vital for making DB affordable. Deficit schemes just keep getting worse and contributions keep on rising. QE”—quantitative easing—“has undermined funding of all DB schemes”.
At which point Guy Opperman has to accept that Ros Altmann, who sits on the Conservative benches in the Lords, is indeed supporting the Liberal peer (Sharon Bowles)’ amendment.
Nor can he enjoy the usual support of Labour , who join the debate through Seema Malhotra (deputizing for Jack Dromey
We regret that the Government seek to remove the amendment made to clause 123 in the Lords. As the Minister is aware, there are grave concerns about the impact of the provisions in the Bill on open DB schemes, which includes many public sector schemes. Labour has been clear all along that we do not accept the premise that good DB schemes are not worth protecting.
And as Neil Gray reminds him, he can’t rely for support from employers or trustees with large schemes.
It is not just me or Baroness Altmann saying this. The schemes are saying that following this path puts their own good and open schemes at risk for members to continue to enjoy.
Faced with a considerable array of opposition, Opperman may have thought he had survived , only to be hit in the solar-plexus by Richard Thomson (a former Scottish Widows corporate account manager and now another SNP pension expert. Thomson pointed out to the Minister that the unintended consequence of squeezing open schemes into the DB funding framework would be to prevent them investing in the patient capital that Opperman has so promoted.
At this point Opperman’s hard line stance showed a crack (if not a crumble).
There is a legitimate and relevant point, although I will resist the amendment, that this is a perfectly valid debate to have in this place. It will definitely influence the regulator’s approach and ensure that, if there is any doubt whatsoever, not all schemes will be treated the same. There is not a one-size-fits-all approach. If anyone is proposing that that is the case, it simply is not. Every scheme should be looked at on its own merits and in its own particular way, because, as all colleagues have rightly identified, schemes have different profiles, different amounts and different objectives. That is what the regulator is trying to do—to build on the current approach.
The main theme of TPR’s DB funding code is that most schemes should not be looked at on their merits but be put on a fast-track conveyor to self-sufficiency and buy-out. This will mean wholesale investment in gilts and the kind of high-grade bond that puts liquidity at a premium (and is quite the opposite of patient capital.
If Guy Opperman believes that the DB code should allow open schemes to continue to take risk as part of their funding strategy then he is either going to have to change TPR’s view on what kind of investment risks are “supportable”.
Alternatively, he may give up the fight and accept that what parliament is calling for, as many schemes are calling for, is the right to determine their own investment strategy based on their time horizons. I make no apology for once again showing why it is economically more efficient for schemes to remain open.
For schemes to stay open , the sweet spot of the “infinite time horizon” must be rewarded. The Bowles amendment to clause 123 ensures that that reward is available. I am quite sure that Ros Altmann, Sharon Bowles or the other supportive peers, are not ready to give up their amendment yet.