Defined Benefit Schemes : Public Policy Adjustments to Increase UK Investment and Encourage Exercise of Discretion

Policy Opportunities for HMT / DWP / DBT

From William McGrath of C-Suite

The impact of the measures below would be to increase investment in UK productive assets; improve the pensions of past and present employees and increase profitability of scheme sponsors.  The impact of Government action can be immediate.

Actions:

• Joint Forum on Actuarial Regulation (JFAR) to be relaunched by TPR / PPF / IFoA / FRC / FCA / CMA / PRA to align pension sector practice with the Government’s growth agenda and provide smarter coordinated regulation.

• State the comparison of bulk transfer and run-on strategies required by FRC’s TAS300V2.1 really is a “must” for DB schemes. A Thematic Review by JFAR led by FRC, the responsible body, and ARGA when turned on will review work produced.  Be clear with actuaries (long subject to negligible levels of scrutiny) that they need to respond and raise standards.  Many issues will self-correct.

• DWP / TPR to reset investment strategy expectations in light of Solvency UK and TAS300V2.1. Gilts plus 1.5% to be a benchmark for schemes reaching low dependency.

• PRA / TPR will reconsider the respective values of FSCS and PPF safety nets in risk/benefit assessments and show better coverage for schemes investing in UK assets.

• Back the exercise of discretion as the surpluses accumulate to increase pensions of past employees and fund / improve pension of current employees. Can be achieved through “value share” arrangements with a life insurer or within current structures.

• Emphasise pension should be maintained in real not nominal terms, as Roy Goode intended when inflation caps were introduced.

• Encourage more life insurer resource to be allocated to UK productive assets by:
  • Reducing solvency cost of holding UK equities and private equity.
  • Increasing “risk margin” weighting of assets held outside direct PRA regulatory control, hedged or not.
  • Increase levy on life insurers to have halo of PRA regulation/ FSCS guarantee as a marketing tool. Lower cost for ring-fenced funds with minimum allocation to UK assets.  Higher costs where assets held outside PRA regulatory authority.  Will influence decisions taken by trustees on who provides bulk transfers by highlighting risk differences as seen by PRA.

• Encourage DB schemes to hold more UK assets by:
  • Making surplus payments of up to 3% of assets a year tax free when used to fund / increase pensions and current contributions to (Collective) DC and when a scheme has a minimum proportion of assets in UK assets (gilts and UK productive categories).
  • Qualifying schemes with UK productive asset allocations to have PPF cover subject only to 2.5% inflation cap. Pre 1997 pensions will increase with inflation in future up to 2.5%.  No 10% cut pre-retirement.

Policies aimed at adding to UK productive investment and providing a level playing field between run-on and buyout strategies.  Make real inflation adjusted value of pensions part of a “Run On 4 Goode” drive.

Here are smart regulations and incentives to increase UK asset allocation without mandation and to update views on fiduciary duty.