This is the second of my reviews of the Government’s response to the report below,the WPC’s authors are listed in this photo
The Work and Pension Select Committee 2024/5
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.
The Government’s response to the Work and Pension Select Committee’s report has a number of recommendations. You can read the first five on the previous blog.
This follows on and contains the Government’s attitude to the current trend to buy out or buy in of insurance company bulk annuity policies.
Recommendation six – reconsider the sale of DB schemes to insurers
Many trustees and scheme sponsors will want to enter an arrangement to buy-out scheme benefits with an insurer, and we welcome the security for scheme members this provides. However, not all will be able to do so, at least in the short-term. Well-funded schemes should also be supported to run on as there are potential advantages for scheme members, sponsoring employers, and the economy.
As part of its work to take account of financial stability considerations, TPR should monitor trends in demand for buy-out and its alternatives and work with financial regulators to understand the implications.
This blog has featured analysis of what has happened by many authorities but most recently by William McGrath. He is not reverend in his views but his call to the insurance industry and actuaries who advise on such purchases is founded in TAS300, an actuarial standard that seems to be largely ignored in work on “de-risking”.
You can read about this initiative and the work of McGrath and others to make sure it is followed. Many of us worry that schemes such as WH Smith that has exchanged pensions for annuities without any clarity as to where surplus has gone.
It is good to see questions being asked by Government and better if they had information they could call on to ask if the interests of all parties are being looked after- that includes members.
Recommendation seven – ensuring pensions are paid in full when surpluses are being distributed
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.
Trustees are supposed to be on the member’s side but they are conflicted being paid by sponsors who have their eye on any surplus. Putting a pensioner at risk of not getting paid down the line may seem fanciful but as with over-protecting through de-risking , trustees can serve members badly by over as well as undistributed surpluses/
Recommendation eight – Government considering incentivising trustees (and sponsors) to take more risk
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.
Government will be moving too fast for many trustees who are familiar with section 58 of TPR rules. The reality is that trustees can end up in prison if their investment strategy fails and they are called accountable for inappropriate risk.
The constraints on growth investment placed on schemes with reference to the maturity of the members, whether the scheme is open and closed and whether on the “fast-track” means that most trustees will be happier sitting on low-risk assets rather than maximising productivity.
I am pleased to see a close relative is starting at Better Society Capital in a month or so. I will have better information from a fund manager to compliment work of others in investment, what make it work for Trustees?
Recommendation nine – pre 97-GMP increases left unpaid.
Some pension scheme members are dependent on discretionary increases to ensure their pension payments keep up with the cost of living. Where these have not been awarded the effect has been, over time, to erode their standard of living. This can be particularly the case for those with rights built up before April 1997, when there was no general requirement to index-link pensions in payment.
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 trustee, 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)
This was mentioned by the Pension Minister at the PLSA conference and is thought will draw funds to pay (where this cannot be paid) from the PPF. There is a strong lobby for these payments to be paid and I look forward to finding out how any future payments to the hard put are made,
Recommendation ten – Paying discretionary increases to pensioners where the scheme’s in surplus
Improvements in scheme funding have given new prominence to the question of how to treat any surplus in the best interests of scheme beneficiaries. For example, there may be discretion after benefits have been secured on buy-out to enhance benefits before returning any remaining surplus to the employer. There may be options allowing scheme members and employers to benefit from surplus in a continuing scheme. Decisions can be for trustees, the employer, or both, in accordance with scheme rules. We heard from scheme members concerns that their interests would be overlooked in this process.
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.
This blog has focussed on two schemes; BP (especially) and Shell, both of which had a history of paying discretionary bonuses based on there being money to pay them. Of late there has been money, demand from pensions but no payment above the bare minimum.
Pensioners in these cases argue that they worked on an expectation of payment when times were good and did so during the many years that they have been bad.
This blog sees a pension paid as a thing to be expected and discretionary payments paid when they can be. The attitude of recent management teams seems to regard pensions as a menace to the company’s strategy. It is hard to see this working where the company has been built up between sponsor, trustee and employee member.
Whether this can be resolved by mandation is unlikely, but where Government makes it clear it expects more to those in the boardroom, we expect management to make clear statements on why payments aren’t made. The Government can make their displeasure clear in a number of ways.
This takes us from recommendation 6-10. I may not be able to cover all 26 recommendations but where comment is omitted , it is due to lack of experience of the issue on this blog