Pensions Oldie is considering how DB schemes, especially those sponsored by small companies in the private sector, could be of help going forward. The remarks in italics are the comment on yesterday’s blog
I think the main focus of the message should be to the Boards and in particular the Finance Directors of British companies. Why are they unnecessarily increasing their future employment costs by shunning DB pension schemes in favour of DC arrangements.
In short, why can’t DB pension schemes to meet the needs of employers to meet auto-enrolment obligations and to staff who would do better with a pension from a defined benefit arrangement than a pot from a DC plan.
If a DB Scheme is funded to the extent that it can meet the buy-out cost, it can be invested “productively” to generate additional surplus over that required to pay the benefits as they fall due. However if you use that surplus to fund individual DC pots, you are losing the assets in the pooled fund that create further surpluses to fund the current and future pension promises by the employer.
Peter argues that at a variety of levels , paying money into DC plans is not an effective way of providing investment and the insurance of pension security. There is no tax advantage to HMRC of paying surplus into DC pots nor to the corporate’s tax liability.
This is the case whether the DC arrangements are within the same pension trust as the DB scheme or whether the surplus is distributed back to the employer and then used to pay into individual employees’ DC pots. The tax effect is also neutral between these two alternatives.
Far from improving the cashflow to the company with a DB scheme, transferring money to DC plans takes money away from the DB scheme; money that if used to improve future pensions within the DB fund does not negatively impact corporate cashflow statements
It is a shock to many FDs to find that if the pension scheme assets are transferred from the pooled fund to individual DC pots, under IAS19 the full “cost” of the DC contribution has to be taken to the P&L A/c in the year of the transfer, whereas if the surplus is left in the pooled fund it will generate an interest credit to the P&L A/c. The same applies on a cash flow basis, the investment income from the pooled fund can be used to pay the company contributions in respect of company and future employees, not possible if the assets are in individual DC pots.
Employers are waking up to the DB scheme being a means to improve investment returns on pensions paid by the trust, returns that can ease contributory strain on the company.
I am aware of at least one DB scheme (incidentally already fully funded on a solvency basis because it has remained open) which is considering accepting transfers in from existing members DC pots at or just before retirement to increase the Member’s DB pension benefits.
In that way the Employer gains the investment return on the additional assets to pay the future pension costs while the member gains the guarantee of the DB pension rights (with or without discretionary benefits) without having to pay the premium and additional administration costs associated with pension benefits from their DC pot whether annuitised or in drawdown. It is the Employer who meets the administration costs of the DB arrangement whether directly or by utilising the Scheme surplus assets.
Oldie points out that unless there is a degree of employer ownership, the master trust is merely taking over the economic, commercial and member perceived value of the money that has come from the employer
As you note, similar possibilities are available to a mastertrust, but there it is the mastertrust provider not the employer who can reap the ultimate reward.
Oldie concludes that a role for the Pensions Regulator is to help small companies that have DB schemes, to make the most of these schemes, where they are a potential asset.
If Rachael Reeves does seriously want to achieve growth, she should recognise that this is most likely to be achieved by smaller companies growing into larger companies. In her challenges to Regulators she needs to consider whether regulators in the pensions area are discriminating against smaller companies, particularly those with existing DB or those who wish to open new DB pension schemes.
There is much to say for employers who want their staff to have pensions rather than pots and we need to look closely at ways in which companies can be assisted to offer pensions to existing staff or give such staff access to a new DB plan.
I suspect that the future is for a new type of DB plan to emerge, where contributions are defined by the employer and the pension benefits sponsored by a commercial entity with capital. Employers must be fully rewarded for creating investment and certainty going forward.
