‘Potential renaissance’ of UK DB pensions mooted amid parliamentary probe

A wide-ranging investigation into the current state of the UK’s £1.4trn (€1.6trn) defined benefit (DB) pensions provision reaches a key stage today, as pension consultants raised the prospect of a changing role for the now-healthier schemes.

Today is the final day of the call for evidence launched by the Work and Pensions Committee as part of its inquiry into DB schemes on 16 March. Information submitted could persuade parliamentarians to change the system’s legal framework.

Patrick Bloomfield, senior actuary at consultancy Hymans Robertson, commented today on the end of the consultation, saying: “We are greatly heartened that the Committee is asking these questions about a potential renaissance in UK defined benefit now, before the new DB funding regulations are finalised.”

The current draft regulations would exacerbate DB’s focus on insurance and run-off, he said.

“A DB renaissance is possible and the societal benefits could be enormous,” Bloomfield added.

“Rekindling DB, to tap into the UK’s £1.4trn of DB assets and restore DB accrual as a mainstream benefit, would require large-scale policy incentives to counterweight the inherent risks,” he said.

The Committee has said that even though the UK’s DB schemes were in decline in the private sector, they remained “of critical importance”, with 9.6 million members relying on them for a big part of their expected retirement income.

Funding levels among the UK’s 5,100 private-sector DB schemes have improved over the last year, alongside an increase in interest rates, in turn driven by a wave of rising inflation.

Paul Cuff, co-chief executive officer at consultancy XPS Pensions Group, said today that the parliamentary investigation was timely in the context of a DB market in which many schemes were now very well-funded.

“We believe the £1.5trn of UK DB pension assets could be used as a force for good to tackle some of the leading issues the UK is facing – including low growth, a tight labour market, and the ever-widening pensions divide between members with DB and DC plans,” he said.

Cuff said his firm was calling for changes to the current regime to help ease cost pressures on employers, encourage people to stay in the workforce longer, encourage investment in the UK economy, and boost DC savings for the next generation.

“These include using surpluses in DB schemes to boost DC contribution rates and improving the level of benefits covered by the PPF, all within a system that continues to protect the security of DB pensions,” he said.

Apart from the question of whether current regulation is appropriate, the inquiry’s terms of reference also include questions such as whether there is enough capacity in the buyout market to meet demand from DB schemes, what The Pensions Regulator (TPR) should do to improve the quality of trustee boards, and whether recent improvements in funding levels change the future role of DB schemes in UK pension provision.

Bloomfield said there were many reasons why 90% of DB schemes closed to new entrants. Legislative reactions to high-profile corporate failures had led to prioritising more secure accrued benefits, he said.

“Parliament’s greatest challenge may be garnering business confidence that DB legislation won’t become hostile in future, long after commitments are made based on a short-term policy incentive,” Bloomfield continued.

Policies which could stimulate DB included resetting legislative and regulatory objectives to balance past and future DB provision, he said, as well as enabling sponsors to use DB surpluses to fund benefits for current workers.

The Hymans Robertson actuary listed encouraging trustees to allow early sponsor access to DB surpluses and removing penal taxes on refunds as another such policy.

A spokesman for the Committee declined to say how many submissions had been received in the consultation so far.

After it considers the responses received, the Committee could agree to publish them on its website.

Oral evidence is the next stage in the process when witnesses will be invited to come and give evidence before the Work and Pensions Committee in person.

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