A UK Work and Pensions Committee report, published today, warns that two decades of regulatory and policy caution from the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) had led to a low-risk approach to investment that threatens to inadvertently finish off the few remaining defined benefit (DB) schemes still open to new members.
With an improvement in funding levels over the past decade presenting new challenges and opportunities for schemes, it called for a “fresh approach” both to funding regulations and the treatment of surpluses in pension and compensation schemes.
Among the recommendations, the committee called for the DWP and TPR to look at ways of ensuring the reasonable expectations of scheme members for benefit enhancement are met where there has been a history of discretionary increases.
The committee said that its inquiry brought up concerns from the industry that the new funding code proposed by the government and due to come into force in September will force open schemes to de-risk unnecessarily, potentially leading to premature closure.
Therefore, the committee has called for the government to address such concerns in the final version of the funding code and for TPR’s objective to safeguard the Pension Protection Fund (PPF) to be replaced with a new duty to protect future, as well as past, service benefits.
It pointed out that the PPF reserves now stand at £12bn and called for legislation to allow the levy to be reduced to zero and for compensation levels to be improved.
To encourage better governance, the committee welcomed the introduction of a trustee register to improve the regulator’s oversight. It noted TPR’s view that consolidation, including through pension superfunds, is one of the main ways to improve governance, and called for the required legislation as soon as possible.
Stephen Timms, chair of the Work and Pensions Committee, said that DB schemes were “hugely” important to savers planning for a comfortable retirement and for the UK economy.
He pointed out that the improvement in scheme funding levels presents opportunities for both to benefit, but a new approach to regulation and governance is needed to protect the best interest of scheme members and allow still open schemes to thrive.
He said: “The flexibility afforded by the much-improved financial position of the PPF, which we applaud, gives the government an opportunity to ensure open schemes are not hindered by overly cautious restrictions imposed by regulations.
“While many trustee boards operate to high standards, new standards for trustees can foster confidence that this is the case across DB schemes.”
The government now has two months to respond to the committee’s recommendations.
A spokesperson for TPR said: “It’s our job to make sure pension savers get their promised benefits, and although funding levels are at their best levels in recent memory with around 80% of pensions schemes fully funded, we are not complacent.”
The spokesperson added that schemes can rapidly be affected by market conditions, corporate activity and insolvency events, which is why the regulator ensures that effective long-term risk management is “at the heart of our approach and the forthcoming DB funding code and regulations”.
“The code also allows for open schemes with a strong sponsoring employer to invest a significant portion of their portfolio in growth assets,” the spokesperson said, confirming that the regulator will consider the committee’s recommendations “carefully” and respond “in due course”.
‘New world of surpluses’
Steve Webb, partner at LCP, acknowledged the shift in the pension landscape from deficits to surpluses but emphasised the need for updated regulations to reflect this change.
He said: “The rules have not caught up with the new world of surpluses and may mean that schemes and members do not get the most benefit from their improved financial position.
“The government needs to decide urgently how it can make sure member benefits are secure and, at the same time, help companies, members and the wider economy benefit from the assets of over £1trn which are still sitting in these schemes.”
Webb added that the offer a full PPF underpin in exchange for payment of a new super-levy remains the best way to achieve this.
Leonard Bowman, head of corporate consulting at Hymans Robertson, said the consultancy called for a “DB renaissance” and welcomed the committee’s proposals to allow still open DB schemes to thrive.
“The regulatory environment needs substantial change to supercharge innovation in DB and reconnect the wealth in DB with societal aims. With surplus capital in DB now estimated by the DWP at £225bn, there’s a once in a lifetime opportunity for sharing that capital across the generations,” he stated.
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