Peter Cameron Brown is one of the regulars at the Pension PlayPen and his comment/post following William McGrath’s session last Tuesday has been engaging me over the weekend. Peter is the Chairman of the Trustees of the UKAS pension scheme and has guided it to being in considerable surplus.

Peter’s comments are in italics, my responses aren’t.

This was indeed an hour well spent, thanks to a great presentation from William McGrath and an intelligent and educated discussion.

Those who want to see the session and the questions, they are available here

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To clarify my own points (and I wish to emphasise I am a Trustee not a lawyer):

It is important that we hear from trustees without their lawyers!

Defined Benefit pensions are deferred remuneration for a period of employment. The deferred remuneration is set out in the Trust Deed and includes guaranteed pension benefits and may also include discretionary benefits.

I only partially agree with this. I think that anyone, including the self-employed, can use pension savings to purchase a defined benefit – whether an annuity or a scheme pension. The link between “service” and pensions determines most benefits but not all.

Anyone who uses approved pensions should be able to access a DB pension!

While the Scheme remains in existence, Members do I believe have a right to have discretionary rights to be met out of scheme resources and this right outlives the transfer of the responsibility for the payment of benefits to an insurance company or another arrangement.

The buy-out of a scheme is not the same as a scheme buying into individual or bulk annuities.  But Peter goes further and asks that buy-out recognises potential benefits from discretionary promises

I therefore believe that the buy out terms must reflect both unfulfilled past potential discretionary benefits and also future prospective enhancements.

The implication is that “buy-out” will not reflect a speculation that the scheme would have afforded such payments in the future so that where there is capacity to pay more, a buy-out must be justified as a “special case” and not as the “default”.

This in my opinion means that scheme “run on” must be the default end game and any decision to follow a different path must be justified by Trustees purely in terms of the interest of Members.

But I am seeing cases where Trustees are preferring TPR and a haircut on benefits to running on (in cases where buy-out is not feasible). This suggests that TPR/PPF and scheme trustees are not considering “run on” a default end game and are prioritising consolidation over run on. In this case not even discretionary payments are being protected, scheme benefits are being sacrificed – despite the offer of additional sponsorship (covenant enhancement).

Section 5 of TAS 300 appears to cover this but does not specifically refer to discretionary benefits set out in the Deed, particularly those where the discretionary power is subject to a defined limit.

Just because they are not specifically mentioned, does not mean they matter. TAS 300 is a valuable check in the glidepath to end-game.

Defined benefits as AE workplace pensions

The second point I was making that is that it has been suggested that employers may wish to reopen closed DB Schemes to a new DC benefit section for current employees as a tax efficient way of accessing scheme surpluses.

I, along with most people, think this more theoretical than practical. However…

I queried whether it would be more appropriate for employers to open a new DB benefit section, with benefit levels they are content to fund (at a minimum the auto-enrolment requirements of 1/120th average salary with discretionary benefits funded for minimum rate revaluations and pension increases).

I suspect that where the burden of sponsoring such an arrangement is shared, for instance using a Capital Backed Journey Plan and a Scottish Limited Partnership to distribute the surplus, this could be achieved without the risk to the sponsor’s balance sheet.

In this way surplus assets are not transferred to the individual accounts of the DC Members and remain available to fund the benefits of the Members of both the historic and new DB sections on a pooled risk basis – and even perhaps generating largely surpluses which could be considered for distribution to both members and the employer.

There is much to be said for keeping DB money “DB” , rather than discharge AE liabilities on a defined contribution basis. But this will require a new kind of adviser, which is where TAS 300 plays a part.

Running on with a new DB section may also be attractive to employers of schemes who are not fully funded on a buy-out basis as this would allow the funding of pension payments out of current contributions thereby minimise the need to sell capital assets and/or suck deficit recovery contributions out of the employer that would not be required in the run-on situation.

I see this as an important role for those new breed of entities providing capital support to sponsors thinking long-term about their pensions

Although not raised in the session, I also now wonder whether the actuarial report to employers required under IAS19 will now be prepared under TAS300 and particularly reflect appropriate buy-out costs (including discretionary increases where appropriate) in advice on asset ceiling values to applied to the (contingent) pension scheme asset value of a closed scheme and reported on the Company’s Balance Sheet?

This is one for the accountants and actuaries  and corporate advisers. I would be interested in further comment.