Billions to go backwards – now how do we move forwards?

This was not supposed to happen. The Pensions Regulator gave a clear steer when it took over 12 years ago that deficits should be eliminated as quickly as possible and, in any event, within a decade.

Employers are spending time and money helping employees address tax issues rather than providing retirement benefits

From an economic perspective, the past 20 years have seen varying conditions impacting the pensions industry. Taking a more granular view, the past 10 years in particular have seen substantial growth in the asset values. 

However, this has largely been driven by ultra-low interest rates, continuing quantitative easing and, since the Brexit vote last year, by the depreciation of sterling.

As a result, traditional measures of liability values have also increased. For the FTSE100, pension liability values have gone up by 85 per cent in that time. The result is a worsening funding position. 

So a rise in interest rates and an end to QE would be my first prescription for getting pension funds back to health in the near to medium-term future.

Tax tinkering has to end

The past 20 years have also seen large amounts of legislation, regulation and guidance, all affecting the way pension funds are operated. 

On pensions tax alone, ever since the system was 'simplified' in 2006, we have had numerous changes in the lifetime allowance; eight different forms of 'protection' against reductions in the LTA; and constant changes in the annual allowance, which was £255,000 in 2010-11 and, for some people, is now just £4,000.

The result is that employers are spending time and money helping employees address tax issues rather than providing retirement benefits.

So my next call would be for an end to tinkering. We need some stability so people can plan for the future with confidence.

We need clarity on long-standing issues

As well as tax planning, employers and trustees have spent considerable time and money in recent years focusing on issues that really should have been resolved by now. 

I am talking here about issues like guaranteed minimum pension equalisation, and the retail/consumer price index lottery, whereby minor and possibly unintended differences in the wording of scheme rules mean scheme A is required to increase its pensions in payment by 1 per cent a year more on average than scheme B.

If FTSE100 companies were all able to switch from RPI to CPI, their pension liabilities would reduce by £30bn.

Some clarity from government and regulators would be welcome – enabling sponsors and trustees to focus resources on managing their schemes efficiently and prudently.

Closing DB deficits would free up time for DC

The regulator continues to press for schemes to be treated fairly alongside other stakeholders. The FTSE100 paid out four times as much in dividends as they paid in pension contributions in 2016, and the regulator has signalled that it is prepared to act if dividend payouts are disproportionate.

Dividends or no dividends, in the future it is clear that some pension schemes will become too big a burden for their employers to bear.

Most private sector defined benefit schemes are closed, and the high cost of accrual means the pace of closure is increasing.

Over the next 20 years, or even before then, we will see more and more employers looking for ways to settle their liabilities – by transferring them out, securing benefits with insurers or, possibly, by way of reshaping and consolidation. 

One hopes the amounts that companies pay to their pension schemes over the next 20 years can be more effective in reducing the deficit than has been the case recently. 

Then companies can begin to address the question of providing decent retirement benefits for those employees who are not in the DB scheme.

Bob Scott chairs the Association of Consulting Actuaries and is a partner in consultancy LCP