UK pension rules risk ‘finishing off’ remaining defined-benefit plans, MPs warn https://t.co/9M2lz6c2Ky via @ft
— Josephine Cumbo (@JosephineCumbo) March 26, 2024
Early birds can catch the free link to Jo’s story here . If the link’s expired, mail henry@agewage.com – I’ve more in the cupboard.
The key statement in the Work and Pension’s report on the funding of UK Corporate DB schemes is as follows
TPR’s approach to regulating scheme funding has been driven by its objective to protect the Pension Protection Fund (PPF). It has prioritised protecting benefits that have been built up, encouraging a de-risking approach which has increased the cost of DB schemes for employers. Given the improved funding position of schemes, and the fact that the PPF now has £12 billion in reserves, this objective is no longer needed. Open
and continuing schemes now need confidence that the additional flexibilities that have been promised will be reflected in the actual approach regulators take in future. To signal the change in approach needed for this, TPR’s objective to protect the PPF should be replaced with a new objective to protect future, as well as past, service benefits.
The “new approach” called for, is mirrored in the language of the Pensions Regulator with CEO Nausicaa Delfas calling for a “new mindset”. But so far, there has been precious little evidence of change , change badly needed if our £1.5trillion DB asset pool is not to further diminish, eroded by an over-conservative approach to investment and by the attrition of buy-out and buy-in by insurance companies.
You can read the Work and Pension’s report here. It’s published today.
The language of the report is unambiguous, the criticism direct
“Two decades of regulatory policy caution have almost entirely destroyed the UK’s DB system.”
https://www.ft.com/content/a0d5a69e-8b56-44ea-9ba8-0bcc71122113
“We continued to hear concerns from open schemes that the new funding regime would require them to de-risk inappropriately,”
The WPC called on the government and TPR to
“act urgently to ensure they do not inadvertently finish off what few open schemes remain by further increasing the risk aversion”.
Last week this blog published evidence from Iain Clacher and Con Keating that the data that TPR is basing its decision making and soon to be published DB code on, is at odds with data from the Office of National Statistics.
Their blog concluded
it would be sound and rational risk management to defer passage of the new funding regulations until such time as the uncertainty in the aggregate funding position of defined benefit pension schemes has been resolved
It is time that the Pensions Regulator took notice of WPC and indeed the ONS data. There is something rotten in the town of Brighton, we need the negative mindset that is doing day to day damage to pensions to change and change immediately.
The Pensions Regulator
Iain Clacher and I will be doing next week’s coffee morning covering our recent blog on scheme funding and also looking at what may be in store.
Too little, too late.
Not for want of trying on our part Derek.
I didn’t mean you both, of course.
I think you know who I did mean.
Could not agree more! It would be the first positive move if TPR & DWP actually have the courage to hit the pause button. The New DB funding code & regulations seem to be being rushed through, based on dodgy data. Any sane regulator would see that it wouuld be pragmatic and sensible just to push back from this October to 2025 either April, or even better October 2025 giving opportunity to further refine the current DB funding code so that it is fit for purpose, and actually does the job intended.
TPR is running a consultation on its draft wording for the funding and investment statement (FIS) required by PSA2021. While TPR’s consultation in its draft new funding code did include recognition of the need for flexibility and the possibility of different approaches to actuarial and investment strategies (albeit you had to look hard for it to find it), TPR’s draft FIS lacks the options in its funding code consultation.
In particular, TPR is demanding alignment of SFO assumptions after significant maturity date with LTFT, a demand which so far as I am aware is beyond its legal powers to make. SFO funding regulations do not require the discount rate to be based on a gilt yield (as TPR wants for LTFT) and do not give TPR a role in deciding the SFO assumptions (that is for the trustees in consultation with the employer).
I’ve been following the development of PSA2021 and associated regulations and always had in mind how I could sensibly apply them with my clients. But TPR’s draft FIS is an over-prescriptive unflexible approach which obsesses with managing “model world” to the exclusion of the real world activity of investing to pay for pensions.
While it is generally the case that Parliament passes legislation which is only a framework, which is then fleshed out by regulations which receive rather less Parliamentary scrutiny, it seems to me that TPR’s approach to the FIS, which cuts across SFO legislation, is a good enough reason on its own for Parliament to pause the implementation of PSA2021.
Unfortunately I haven’t had time to read the DWP Committee’s Report yet, but I wholeheartedly agree with the comments here.
I think the fundamental problem is the actuarial approach being taken to the consideration of the funding of DB pension schemes. Borrowed from insurance company pricing models, essentially all the valuation methods view a DB pension scheme as a basket of individual annuities or deferred annuities, and worse still those annuities are being purchased afresh at each valuation date. As a consequence TPR has completely ignored the key characteristics of a DB pension scheme:
1. The scheme operates on a pooled risk basis, therefore the “gain” created by an early demise of a member becomes available to pay the pensions of other members.
2. The actuarial valuations completely ignore the actual cash flows of the scheme, so a scheme receiving a stable and secure income from its investments sufficient to pay the pensions may still be regarded as having a deficit requiring additional contributions if the assumptions used for the valuation are based on lower yields.
3. Current market values are inserted for all the Scheme’s assets even when that asset is generating a secure and stable income stream. Market values, say of illiquid assets, are irrelevant to a scheme that intends to hold that asset into the indefinite future or maturity. Reduction in market prices are good news for cash flow positive schemes and for the future cash flows from accumulation funds.
Asset based valuation models only partly address these issues but are preferable to the bond based model particularly for closed mature schemes.
It is a shame that the TPR has not recognised the issues with its valuation approaches and appears unlikely to challenge its own entrenched positions even though the DB Funding Regulations do refer to cash flows to pay pensions as they fall due. A collective DB pension scheme is still the most cost effective way to provide a secure income in retirement.
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As you say “ There is something rotten in the town of Brighton, we need the negative mindset that is doing day to day damage to pensions to change and change immediately.”
All the people I’ve met from Brighton are well intended generally with a consumer protection background. But the whole mindset has been polluted by the politicisation by the original remit, effective to protect the PPF at all costs, including killing all thd DB schemes for people working in the private sector. They also sought to convince themselves and everyone else that DB was prohibitively unaffordable. This was absent of course the irony that all those private sector workers and companies will have to work all the harder and longer to pay the apparently affordable public DB pensions.
I truly fear the destructive mindset is so deeply embedded it can’t be changed from within. It’s akin to asking the N.Korean regime to immediately switch to free market democracy.