Many defined benefit schemes will never reach full funding – we need to look at the alternatives now, argues Tim Middleton from the Pensions Management Institute.
With so many schemes seriously in deficit and, as some have suggested, unlikely to ever achieve full funding, we need to be prepared to consider new options for addressing the seemingly unresolvable.
Insisting that schemes achieve full funding in order to honour existing commitments, is, frankly, a pipe dream
We certainly need to move away from the rigid binary choice that has applied to date. Insisting that schemes achieve full funding in order to honour existing commitments, is, frankly, a pipe dream.
However, on the other hand, allowing schemes to fall into the Pension Protection Fund when better alternatives are available somewhat shows an absence of imagination.
This is why the recent settlement concerning the British Steel Pension Scheme is such good news for all concerned. This story represents a triumph for original thinking and for allowing creative negotiation to reach a compromise that best suits the interests of all involved.
Half a loaf is better
The use of a regulated apportionment arrangement has allowed the previous scheme sponsor, Tata Steel, to be separated from the scheme and remain commercially viable. At the same time, the BSPS’s 130,000 members have been given the option of having accrued benefits provided via the PPF or to be transferred to a new Tata Steel scheme.
Increased use of RAAs is 'inevitable', experts say
The Pensions Regulator agreed a regulated apportionment arrangement with Hoover in May, as experts say the number of RAAs, as well as the amount of due diligence involved, is likely to increase.
However, the new scheme offers benefits which will be reduced from what was offered via the old BSPS, and for industry traditionalists, this is less than ideal. In spite of this, the benefits provided will in many cases still represent a superior alternative to the traditional default option of the PPF. This introduces a degree of pragmatism which to date section 67 of the Pensions Act 1995 simply has not permitted.
When benefits are threatened because a scheme has become stressed, it is surely better to remember the old maxim that ‘half a loaf is better than no bread’. If we acknowledge that many schemes – possibly as many as a thousand – will never be able to achieve full funding, it is now surely time to abandon the orthodoxy of a past generation and to recognise that pragmatism, creativity, and compromise must be allowed to trump inflexibility and self-delusion.
It is possible to resolve the long-running problem that has dogged DB schemes in the UK. The BSPS story has provided an example of an acceptable endgame; the industry and government need to demonstrate the will to follow its exciting precedent.
Tim Middleton is technical consultant at the Pensions Management Institute
