Pension Oldie has been commenting on my blog . If I had an oldie’s party, he’d be my punky monkey.

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It is my strong belief that a very easy win for UK Economic growth would be a radical re-appraisal of the legislative and regulatory framework surrounding occupational pension provision.

For too long (at least since 1993) this has been entirely focused on damage limitation exercises and no consideration has been given to what the system should be trying to achieve.

Given the current basic taxation position of:

• Contributions paid by employee – paid out of income before tax
• Contributions paid by employer – an allowable cost for Corporation Tax
• Investment performance by the Pension Fund – Not assessed to tax
• Benefits paid out to Members and dependants– Subject to tax (except a capped pension commencement lump sum)

I believe the objectives of any occupational pension system should be:

For the individual:
The maximum predictable income in later life or permanent employment incapacity protected against inflation, plus appropriate post mortem provision for those dependent on the individual.

For the employer
The lowest predicable cost consistent with the individual objectives for its employees.

I believe legislation and an appropriate regulatory regime should seek to meet these apparently conflicting objectives.

I believe that defined benefit pension provision offers the most advantageous route towards those objectives for both the individual and the employer.

Further legislation and regulation should seek to fulfil the objectives and not to hinder them. Consider the low dependency funding objectives set in the DB Funding Code (Gilts + 0.5%).

If we assume a 20 year liability profile this sets widely differing funding objectives depending entirely on the date of valuation:

• 31st December 2021 1.72%
• 31st March 2022 2.36%
• 31st December 2022 4.58%
• 31st March 2023 4.42%
• 31st December 2023 4.69%
• 31st March 2024 4.93%
• 31st December 2024 5.63%

Consider the employer with an “End Game” low dependency deficit recovery plan based on a 31st December 2021 valuation.

At the 31st December 2024 valuation it discovers that the deficit was over-stated. Even worse, the pension scheme may have attempted to migrate its assets to match the valuation assumptions under an LDI policy.

Has this allowed the employer to thrive and grow?

In an open DB scheme those variations can be smoothed out and any apparent shortfall met out of fresh employer (and employee) contributions and the investment return from an investment policy potentially unconstrained by regulatory requirements.

Similarly any apparent surplus remains recoverable by the employer through the “balance of cost” funding basis.

Posted with a wink to the Pension Oldie!