This 68 page report is probably the sternest rebuke to the Pensions Regulator and the DWP we have seen from Stephen Timms. It includes 23 recommendations which are clipped out here so you get none of the fat and all of the meat.
The current funding position
1. The Pensions Regulator and the Pension Protection Fund should continue to
work with the Office for National Statistics to reach an understanding of the funding
position of DB schemes and publish the results.
2.The Government should set out how it plans to promote
retirement income adequacy in the future and the role it sees DB schemes, particularly
open schemes, playing in this.
The scheme funding regime
3. In future, DWP should commit to ensuring that Parliament has the material
details it needs to make an informed judgement on the legislation it is being asked to
vote on.
- it is essential that DWP and TPR work with open schemes to address the remaining concerns—particularly around the employer covenant horizon—and report back to us on how they have done so before the new Funding Code is laid before Parliament.
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The objective to protect the PPF should be replaced with a new objective to protect future, as well as past, service benefits. TPR should work with the pensions industry on what the change would mean in practice and what capabilities it will need to deliver on it
effectively.
Scheme surplus
6. TPR should monitor trends in demand for buy-out and its alternatives and work with financial regulators to understand the implications. (Paragraph 59)
- DWP should conduct an assessment of the regulatory and governance framework that would be needed to ensure member benefits are safe and take steps to mitigate the risks before proceeding. (Paragraph 70)
We remain to be convinced that the PPF underpin would be an effective incentive to
trustees to consider increasing their investment risk. DWP and TPR should consider
whether there are changes to the funding regime that could give trustees confidence to
take appropriate investment risk. (Paragraph 74)
. TPR should undertake research to find out: how many schemes have provision for discretionary increases on pre-1997 benefits within their rules; whether the discretion is for the sponsoring employer or both; the number of years in which they have paid
discretionary increases on pre-1997 rights; and in the years they have not done so, the
reasons for this. (Paragraph 83)
DWP and TPR should explore ways to ensure that scheme members’ reasonable expectations for benefit enhancement are met, particularly where there has been a history of discretionary increases. (Paragraph 89)
Governance
11. The Government should continue to work with the industry to create an environment that supports investment in the UK economy. (Paragraph 96)
- DWP should introduce measures to improve the accountability of sole trustees and to enable scheme members to be involved in their appointment. (Paragraph 101)
DWP should set a date by which it intends to make accreditation mandatory for professional trustees. (Paragraph 108)
DWP should explore ways to support lay trustees with the time and costs needed to become accredited and report the results. It should set out plans for ensuring every trustee board has at least one accredited member, lay or professional and a timetable for achieving that. (Paragraph 109)
We recommend that TPR should use the register to report annually on the number of trustees who have completed the toolkit. (Paragraph 113)
The Government should consult on the detailed proposals of the Superfunds legislative
framework to protect member benefits and then introduce primary legislation for pension Superfunds as soon as possible. (Paragraph 125)
The Government should explain whether the core aim of a public consolidator
is to rescue stressed schemes likely to enter the PPF in any case, or is it for small
schemes who may face challenges accessing the buy-out market. (Paragraph 130)
18 TPR should consider requiring schemes to set out why they have pursued a particular
approach and why it is in the best interests of scheme members. (Paragraph 131)
Pension Protection Fund and Financial Assistance Scheme
- The Government should find an early legislative opportunity to give the PPF more
flexibility in how it sets the levy, allowing it to reduce it to zero and then increase it
again if necessary. (Paragraph 139)
20.. DWP should bring forward its promised consultation on levy changes and PPF compensation levels without delay. (Paragraph 142)
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The Government should legislate to provide indexation on compensation in respect of pre-1997 rights where scheme rules provided for that. It should work with the PPF to consider changes to compensation—such as raising the cap on indexation of post-1997
benefits above 2.5%—as part of its forthcoming consultation on levy changes and PPF
compensation levels. (Paragraph 151) -
The Government should review the Financial Assistance Scheme, including looking at the case for removing other discrepancies in FAS compensation, compared to the PPF, such as the continued application of the compensation cap and lack of interest on arrears. (Paragraph 161)
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The Government should report back to us by the summer recess on how it intends to ensure an adequate means of redress for AEAT pension scheme members. (Paragraph 165)
A very good synopsis.
An excellent, thought provoking and necessarily challenging report and a very helpful summary. At least one reader would be sad if I didn’t point out that it covers less than half the DB pension promises in the UK! I’ll not comment on the funded local government arrangements, indeed their pooled investments are an excellent model for the future. The massive other DB problem is the £1.4tn of accrued index linked pensions promises for our vital, deserving and unconsidered public sector workers, not just those about to finish a night shift as you read this.
The “fund” is the economy and the benefits are based on assumptions of GDP growth, historically CPI+3.5%, but reducing for future accrual to CPI+1.7% next month. This historic permanent (not triple) pensions lock involves a huge transfer of liability to future tax payers, you, your children and grandchildren. Indeed public sector legislation requires actuarial valuation hypocrisy in ignoring actual GDP growth in the valuations; Doubling an employer contribution rate is clearly too volatile so let’s ignore actual experience!
Make that 2. Important point you make, but wrong blog topic.
Not sad, but it supports and allows a distraction from the central point on the funding regime for private sector schemes.
Thank you Henry. Your capacity and turnaround is humbling.
A very important piece of work by Mr Timms’ committee. More important than many will realise.
Fully expect usual silence from TPR (hoping this report fades away), and platitudes from DWP. And behind the scenes lobbying to kick it into the long grass – there is an awful lot of money to be made from the c£50bn pa transfer of Trustee and member funds to the opaque insurer regime. C£10bn for each £50bn will support the City, rather than members pensions.
Hitherto TPR had no real concern about the health of individual schemes or the effect of its policies on a system wide basis in hamstringing an economy, only concerned that the schemes weren’t a drag on the PPF. Broadening the remit to actually promote rather than eliminate pension schemes will be important. The distinction between open and the closed schemes is another one of these actuarial modelling simplifications that has become a convention or axiom, when in most cases the distinction is false – even closed schemes need to participate in supporting, and enjoying the rewards of, an invested functioning economy. But that’s a battle for another day.
Hopefully the report will support a change in mindset and an understanding, given the material level of overfunding in the DB universe, thst actually we can produce a system to deliver modest living pensions for working people, rather than lumping them with a compulsory savings pot. Everything starts with the vision and then the will to do better.
It does appear that the DWP Committee seem to be largely on top of the issues (perhaps in no small part due to the evidence provided by commentators on these blogs). I only hope they will manage to be effective in changing the mindset of the DWP and TPR who still appeared to be in 2003-2004 territory, at least when the DB Funding Regulations were drafted.
It was also interesting yesterday to watch the House of Lords Grand Committee debate on the DB Funding Regulations. (Watch https://parliamentlive.tv/event/index/742488cd-7d70-4126-ba87-fb0800cdb3d2?in=15:45:02 )
Once again it appears the Peers appeared critical of the TPR and the DWP for putting forward the Regulations and the Explanatory Memorandum without regard to up to date information on key issues, such as the impact of the LDI crisis (as per Con’s blog https://henrytapper.com/2024/03/22/ons-data-casts-doubt-on-uk-db-funding-levels/ ).
I was particularly taken by the contribution of Lord Davies of Brixton (an actuary and member of Pensions Playpen) who stated:
“The regulations are patently too prescriptive. The details that they require are not directed at the objective of protecting members’ benefits but are about establishing a system where box-ticking will take priority over the longer term and broader interests of scheme members.
I have also argued for some time that the TPR misunderstands its role. There is a sort of assumption in its thinking that the calculation of technical provisions represents the best valuation basis. New readers may well find that this is getting into deep water but the point is that the actuary who undertakes the valuation at the request of the trustees must comply with the appropriate professional standard: Technical Actuarial Standard 300. This is the latest version, coming into effect in April.
It is notable that these requirements, which any actuary valuing the solvency of a pension fund should follow, do not mention technical provisions. In essence, the technical provisions are there to trigger action by the regulator; they are not there to substitute for the scheme actuary’s solvency valuation. We have what is in effect a dual basis. The scheme actuary working for the trustees will advise what they believe to be the appropriate contribution rate. Parallel to that, there is the system of technical provisions that, if triggered, require a separate valuation to be undertaken to calculate the recovery plan.
They are quite separate operations but the TPR consistently confuses the two. The end result is that, by overemphasising the role of technical provisions, schemes are being forced into this problem of excessive care, or excessive protection, of the members. It is not at all clear to me that this bureaucratic overweight on the operation of pension schemes ultimately favours the members in any way. In effect, it forces schemes—LPI is just one example—to invest in gilts, which is bad for members; there is no question about that. It is good for the Pension Protection Fund, and good for a Government who are concerned about being held up as not caring about the protection of members, but members’ benefits are drawn from the scheme so the scheme should be funded in accordance with the actuarial solvency standards, as set out by the Financial Reporting Council.
For example, these regulations, together with the guidance note that will follow from TPR, effectively enforce undertaking valuations on what is known as a gilts-plus basis. That fails to recognise the breadth of investment opportunities that are available to a pension scheme, which ultimately will benefit the members through providing adequate levels of return and benefits.”
I believe that a better understanding of these matters by Trustees may have avoided some of the scandals of the “risk transfer decades”!
We can but hope you’re right PensionsOldie.
It seems absurdly obtuse if we are to continue on the current ‘flightpath’, shepherding the transfer of £500bn of overfunded private sector schemes into the hands of a handful of insurers, so diverting c£100bn of value away from members (and sponsors) to further enrich the consultant class. To do so would be (another) greatest own goal in social economic history.
The arcane insurer regime was never designed as a systemic solution – it was for those schemes subject to a corporate failure, and gave the insolvency practitioners one chance to maximise the funding to ensure pensions would be paid under all circumstances no matter how extreme, and as such it is fully loaded with excess prudence and a day-1 built in funding surplus.
It was a conceptually incrementally difficult target for TPR to steer schemes towards, providing convenient political cover for TPR against scheme or corporate failure (“we told to fund more”). TPR machinery then marshalled all its forces around buy-out as the “end game”, because it had no remit or mental flexibility to think otherwise. Its solution to out the box thinking was to force everyone into its box!
We must allow / encourage schemes to invest and to seek to optimise member benefits, for the good of members and the economy that underpins the whole model. The change of the TPR remit is a first and crucial step, ASAP.
Sorry iPhone typo – last line to read
“”The change of the TPR remit is a first and crucial step, ASAP”
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