Increasing return on investment.
We have a Pension Protection Fund with a surplus that is obscene compared with what that money could do in this country.
We have a regulatory regime that means that Defined Benefit pensions are still funded on the most conservative of basis’s.
We now have pension schemes that using a bizarre accounting method that called many schemes bust , now determines three quarters of them in surplus.
Yet , rather than demand these surpluses , created by starving their sponsors of cashflow for two decades, there are calls right now to increase regulation to ensure nothing could ever go wrong again.
This call for further regulation comes from a consultancy – XPS and is made in a trade paper – Professional Pensions. Frankly I am flabbergasted by it!
Policymakers should introduce simple safeguards for the defined benefit (DB) surplus regime, XPS Group says.
The consultancy said, ahead of the deadline of the government’s consultation on DB surplus reforms, policymakers must introduce safeguards to “bolster confidence” in the new framework.
The firm made several recommendations for how the framework could be changed to ensure trustees have greater confidence to unlock surpluses while protecting member security and building trust.
Its proposed changes include requiring trustees to consider whether low dependency will remain the appropriate measure for scheme funding, requiring trustees to consider the type and suitability of any protections in place against the risk of future underfunding, and explicitly including covenant advice among the categories of appropriate advice set out in the regulations.
It added the proposed reforms present a “significant opportunity” for trustees and sponsors to make use of DB surpluses, provided the framework “maintains appropriate protections for members and confidence in long-term funding”.
XPS Group head of pension solutions Wayne Segers said:
“We strongly support the government’s proposed surplus reforms and are already working with employers and trustees who are preparing to make use of them.
“Linking surplus to low dependency is logical but low dependency valuations are new, and market best practice is still emerging. Only time will tell if the market managed to set the bar at the right level.
“The surplus rules need to recognise this uncertainty. We are asking for the regulations to give trustees more structure around their decision-making, helping to safeguard against poor outcomes undermining confidence in the wider surplus regime.”
Head of covenant Arabella Slinger added:
“Incorporating covenant and protections into a surplus policy is a natural part of what well-managed schemes are doing. Reflecting this in the regulations will help trustees and employers to unlock the benefits of surplus strategies while protecting the hard-won funding improvements that have been achieved over recent years.”
Head of DB run-on Tom Froggett said, as trustees and employers explore the new surplus flexibilities,
“the priority must be to protect member security while preserving the flexibility to agree scheme-specific solutions”.
“These objectives are entirely compatible. The legislation should provide clear safeguards around funding and covenant without becoming unnecessarily prescriptive. That will allow trustees and sponsors to reach arrangements that reflect their scheme’s circumstances and deliver positive outcomes for all parties.”
I cannot think of any other market we are invested in which has half the protection that DB pensions have already. What about other kinds of pension savings, what about the prices of houses we live in , what about the banks we invest in?
We have put in place belt and braces for pensions, it is possible for protection of these schemes to go too far, it happened in the autumn of 2022 when a quarter of the value of DB pensions was handed over to banks who had been used to protect schemes from falling interest rates when interest rates were already at an all time low.
Advisers and regulators have got together and found new ways to over regulate and here they go again. My oh my.
Could not agree more Henry.
It is the Trustees duty to look after the interests of the Trust beneficiaries. Failure to do so is a breach of Trust. A DB scheme beneficiaries include pensioners, dependents, active & deferred members and the SPONSOR.
There is no need what so ever for over regulation, that lines the pockets of advisers as Trustees and Sponsors attempt to find the appropriate path without falling foul of the PSA 2021 and potential jail.