Waiting for the sunshine: The challenges facing DB

Defined benefit pension schemes in particular may feel concerned about the impact of Brexit, especially following latest estimates from the Pension Protection Fund showing total DB scheme deficits have soared to a record high of £383.6bn.

In the wake of the referendum result, DB schemes’ attention is likely to turn to issues such as their investment strategy, sponsor covenant and, in cases where it’s approaching, their triennial valuation.

The key element to remember is that pensions are long-term investment vehicles. So while schemes may take some action to moderate any immediate market exposure, most should avoid making any knee-jerk decisions based on short-term market movements.

Instead their first steps are likely to be to speak with the sponsoring employer and advisers about how to continue to manage the scheme effectively for the long term.

Moderation from the regulator

Alongside this long-term approach from schemes, we urge the Pensions Regulator to use its existing powers in a proportionate and flexible manner over the coming weeks and months.

It’s important the regulator assesses the impact recent events will have on schemes, especially those going through the valuation cycle in the near future, and considers whether a new approach is needed for this period – and indeed its guidance statement issued last week was a helpful intervention.

Should current trends continue, DB pension schemes may decide to look at different approaches for the longer term, such as investing in alternatives to expensive index-linked gilts − like infrastructure.

Pension schemes are increasingly recognising the benefits of investing in infrastructure, as evidenced by the continued success of the Pensions Infrastructure Platform, which recently announced the completion of its first deal as part of the PiP Multi-Strategy Infrastructure Fund.

The uncertainty following Brexit is the latest in a series of external difficulties for DB schemes.

We have already seen big pension schemes – such as BHS and British Steel – under pressure from changes in their sponsoring employer. While these examples are very different, they both illustrate how DB schemes can be vulnerable to corporate and economic factors beyond the field of pensions.

That is why earlier this year the Pensions and Lifetime Savings Association set up its DB Taskforce: to undertake a review of the challenges currently facing DB pension schemes, and make recommendations to the government.

At the beginning of June, the taskforce published its call for evidence, which closed last week. Members of the taskforce will now begin to study responses with a view to announcing initial findings at the PLSA Annual Conference in October.

Graham Vidler is director of external affairs at the PLSA