Making sense of defined benefits with Govt and WPC

The Work and Pension Select Committee have published a report on DB pensions which is the first under a Labour Government. Here it is to read and here is the link.

There is plenty in the Pension Minister’s foreword  that we no already but Torsten Bell is keen that Trustees can invest for growth without threat of imprisonment

While we are making positive changes through these already announced reforms, we want to go further. Reflecting on the Committee’s recommendations, we will explore ways to strengthen trustee capability and governance, to ensure we safeguard member benefits and maximise economic growth in a consolidated landscape.

This can be read up in TPR’s guidance on section 58.

The Government’s response to the Work and Pension Select Committee’s report has a number of recommendations. The first and most relevant to this blog relates to recommendations

Recommendation one – accurate picture of funding needed

the PPF and the ONS have produced different estimates of the extent to which the value of the assets in DB schemes reduced over 2022. The PPF acknowledges that its figures do not fully reflect the effects of market disruption during the LDI episode. It is important to have as accurate a picture of funding as possible.

Government , through the WPC, should be thankful for Clacher and Keating who have brought this to general awareness through this blog.

Recommendation two – DB to be supported to run on

There is sufficient evidence of improvement in the funding position of DB schemes to justify a new policy approach. However, it is imperative that there is no return to a world of deficits. Policy changes therefore need careful thought so that they grasp the opportunities offered by improved funding levels, while being agile enough to respond to future challenges. One of the opportunities is to support DB schemes to remain an active feature of the pensions landscape, helping to deliver adequate retirement incomes.

It is hard to see how DB pension schemes can run on without more scope to invest over time. There needs to be clarity about what “support” DB schemes will get to remain an active pensions landscape, rather than handing over assets , liabilities to insurers.

The Scheme Funding Review came out of the low point in confidence in DB Pensions (2018) when schemes were seen as a threat to the PPF through collapse. The result was draconian requiring employers to pay both to bolster the PPF but to require their pensions did not rely on investment returns but on substantial deficit contributions. The result – despite the disaster of LDI in 2o22 is that schemes do not need the PPF which is £14bn in surplus while sponsors have not been able to invest for the future nor their pension schemes. The scheme Funding Review so far has not worked and most DB schemes cannot grow their assets over time due to mark to market valuations.

Recommendation three – TPR’s funding code to be written in line with Government policy

Plans for the new DB funding regime were forged in a different era when the vast majority of DB schemes were in deficit and amidst concern that employers were seeking to evade their responsibility to underfunded schemes. Despite significant changes since then—improved funding levels and what these mean for future policy—the fundamental principles underpinning the new regime are unchanged: schemes are expected to target a position of low dependency at the point of significant maturity. While we welcome the changes made by DWP and TPR to allow more flexibility in the investment approach, it is unclear what the overall effect will be. Schemes have not yet seen the final version of TPR’s Funding Code. It is unfortunate that Parliament has been asked to vote on the Regulations before this was published and stakeholders have had the opportunity to evaluate and comment on the full picture.

This is a severe reprimand on TPR who the response suggests have published a funding code which will result in schemes missing out on opportunities to meet fears initiated in a different era and by a legislator and regulator that did not have a positive view of pension schemes running on. Indeed the only target then was to keep schemes out of the PPF.

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. (Paragraph 35)

Recommendation 4 – Open DB schemes need not be suffocated.

Open DB schemes help meet two important objectives: providing adequate incomes in retirement and investing in UK productive finance as they have greater capacity for this than closed schemes. Those responsible for running DB schemes have long expressed concerns that the Funding Code would force them to de-risk unnecessarily, increasing the costs to employers and resulting in their premature closure.

The view of TPR of the employer covenant has been an issue for many open pension schemes. Put simply, TPR takes the negative view of an employer’s sustainability. It is a matter for these schemes, many of whom provide readers to this blogger. If we have a negative view consistently then it is hard to encourage sponsors to continue and for schemes to take a positive view on UK companies and their equity.

Recommendation 5 – TPR should not be driven by strategy to protect PPF

TPR’s approach to scheme funding has been driven by its objective to protect the PPF. We agree with those who told us that the objective now looks redundant, given the PPF has £12 billion in reserves. Two decades of regulatory policy caution have almost entirely destroyed the UK’s DB system. DWP and TPR need to act urgently to ensure they do not inadvertently finish off what few open schemes remain by further increasing the risk aversion, even while the risks of default have reduced substantially. Open and continuing schemes need confidence that the additional flexibilities that have been promised will be reflected in the actual approach regulators take in future.

This blog has been posted by statements from many pension directors with DB schemes; their view is that the PPF has become a figurehead to be protected at all cost. It is good to see Government at last saying this in open

To signal the change in approach needed for this, 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.

I have so far covered only 5 of the 23 recommendations, I won’t report on all but will tomorrow pick up on the key ones.

The Press reports on this appear to an interpretation of this Government response from the ABI and PMI. Other views are needed. I hope that further comments and blogs are more accurately  reporting what the Government is saying not what professional insurers and trustees want to be said.