For The Pension Regulator’s (TPR’s) whole existence we have worried about scheme deficits and a lack of longer-term planning. When a sponsoring employer of an underfunded pension scheme becomes insolvent, those members may go into the Pension Protection Fund (PPF). While the PPF can provide valuable compensation, the impact of this transfer can be material to members.
Those members are often older people who have little or no chance to make up the shortfall in their expected retirement income.
That is one of the reasons we worked to implement our new DB funding code. We want to make sure all schemes are focused on the long-term and focus our efforts and powers where they can really protect members’ benefits.
Today the defined benefit landscape looks very different to when we were set up 20 years ago. Our analysis from 30 September 2024 estimated that 75% of schemes are in surplus on a low dependency basis with an estimated £160 billion spread across the market. Even on a buy-out basis our analysis shows that 49% of schemes are in surplus by as much as £97 billion across the market.
This new funding environment has brought new options and choices to trustees.
In the past, trustees and employers have considered insuring benefits as the end goal of their scheme. The insurance sector has capital requirements which mean that insurers can withstand 1-in-200-year shocks. It is still a good option for many.
But insurer buy-out is not the only option for trustees to consider.
Ongoing market innovation has led to a wider range of financial, governance, and insurance options. Each have their own pros and cons.
Not every option will be right, or even available, for every scheme. Trustees need to really think about the specific circumstances of their scheme and their members.
That is why we’ve produced new guidance for trustees and employers, to help them consider the range of new models and options available.
From appointing a professional trustee to considering a superfund, it sets out some of the factors to consider, with several case studies providing examples of the questions trustees should be asking themselves.
It’s critical that trustees take advice and undertake an appropriate level of due diligence, think about the different risks and opportunities, and document the steps taken when making any decisions.
Running on and surplus
While the path to buy-out is well-trodden, running on – and potentially releasing surplus – is a new consideration for many DB schemes.
And for those schemes with scale and high governance standards, that have the right combination of employer covenant strength and funding level, it could be an option to consider.
It has been many years since surplus was last a common topic of discussion. But we are now in a very different pensions landscape to 30 years ago and at the time, the way surplus was assessed was very different, based on much lower levels of funding and member protection.
Surplus release won’t be right for everyone. Nonetheless it is right that well-run, well-governed and, crucially, well-funded schemes can consider releasing surplus, should they wish. And it’s right that our latest guidance goes into more depth to support trustees in considering the range of options.
Schemes should have documented policies regarding their long-term objectives and end game options, including surplus – particularly if releasing surplus could strengthen the employer covenant and enhance member benefits.
Government has set out its intention to reform the law in this area. Until then the current rules apply, which are different in the case of an ongoing scheme compared to a scheme in wind-up. For the latter of these, we have recently had a case before our determinations panel which will be useful for schemes to read.
We will be engaging more on this area with our regulated community and industry once we have further visibility of the proposed legislation.
Next steps
We hope our new models and options guidance helps you engage with your advisers and have better informed discussions around the range of options that might be available to your scheme.
Clearly, we can’t provide advice, but through our market oversight and supervisory engagement, we are open to proactive dialogue as you consider your options.
Regulators seem to swing between sclerotic behaviour and verbosity, on this occasion issuing yet more “guidance” because, of course, regulators “can’t provide advice”.
It’s telling to read the list of those who responded to TPR’s consultation on new models: eleven consultancies, five investment “solution”
managers, the PLSA and the DWP. Trustees seldom respond; individual
members never seem to respond.
Having had a dig at TPR earlier, this nonsense from
PLSA is surely even worse:
http://www.bbc.co.uk/news/articles/cj42022gqzwo
PLSA suggest the cost of a minimum retirement living standard for a one-person household has decreased by £1,000 a year to £13,400.
Their minimum standard is calculated to include money for a household’s weekly groceries, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week.
None of the estimates include housing costs, because the PLSA expect many pensioners have paid off a mortgage, while those who rent often have a benefit entitlement to help them pay.
Again, in reporting this patronising claptrap the BBC did not speak to any pensioners or charities far more familiar with the realities.
Instead they quoted people like Zoe Alexander, director of policy and advocacy at the PLSA, saying, “For many, retirement is about maintaining the life they already have, not living more extravagantly or cutting back to the bare essentials.”
Or Paula Llewellyn, from insurance company L&G, saying, “Planning how you’ll spend your retirement years is often exciting …”
Or Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, saying, “Once you’ve got an idea of what you want then you can start to put a figure on what that might cost and you can then use online calculators to see if what you’ve got in your pension will get you where you need to be.”
I can’t believe TPR on here are still peddling their flawed estimates of DB funding as at September 2024 nearly six months later.
Do they just ignore the Clacher & Keating critiques of TPR and PPF estimates?
Not that long ago a Pension Playpen one Tuesday was shown the extent of the potential errors in those 2024 estimates.
The overall technical provisions surplus falls to £61 billion, not the £207 billion TPR like to quote.
That is 53% of schemes in surplus, not 82%.
Then low dependency shows a decline from £137 billion overall surplus to a £21 billion DEFICIT. And that is 47% of schemes not 75%.
Con Keating and quite a few others among us really do think TPR seems to be deliberately trying to understate the cost to the UK economy of shifting to low dependency by following the latest DB funding code.
When will TPR open their eyes and address these critiques?
Thanks Derek, I published the blog without comment and won’t comment now, but it’s good to see comment from you
Which salesmen sold DB?
Did they warn about capped compensation?
Where is the reasons why letter explaining the risk to the member and
who will pay compensation for the mis_selling of LDI?
From memory Maxwell was only £800M and Mirror Group pension lost about £460M ( might be included in the £800m)
Your memory is pretty spot on.
The UK Government, however, set up the Maxwell Pensioners Trust Fund to retrieve money from financial institutions who had taken pension fund assets as collateral and wished to avoid court action.
Sir John Cuckney, the government-appointed arbiter, recovered most of the missing £400 plus millions of pension monies – £276 million in out-of-court settlements and the Government finally agreed a payout of £100 million – but those negotiations took three years and some of Maxwell’s non-Mirror Group employees died without receiving a penny of their pensions.
Thank you,
My question is who made the error in LDI? Will they be held to account?
If the adviser were an IFA there would be a gaggle of journalists pursuing them
The “mortality” of the sponsoring company of DB seems to be wilfully ignored
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