The Work and Pensions Committee enquiry into the BHS Pension Scheme, coupled with the fate of Tata Steel, once again shines the spotlight on defined benefit pension schemes for all the wrong reasons.
Ultra-low gilt yields and improving life expectancy rates have resulted in increased funding deficits, even though many schemes have now closed to further accrual.
Perhaps we now need to question seriously if accrued DB promises are “sacrosanct” or whether the system should allow for rights to be reduced or adjusted to avoid future PPF entry
Back in 2007, the buyout solvency deficits of all schemes was estimated by the Pension Protection Fund to be £440bn, and the Pensions Regulator reported that the average recovery plan was seven and a half years.
Today, despite employers having contributed close to £120bn in deficit repair contributions, the PPF’s buyout deficit estimate has nearly doubled to £805bn and average recovery plans have lengthened to eight and a half years.
These figures ignore schemes that have wound up over that period and either moved into the PPF or secured members’ benefits through insurance.
Time to reassess DB
Last year a Pensions Institute paper highlighted a worst-case scenario whereby of the 6,000 remaining DB pension schemes the members of about 1,000 “stressed” schemes would end up in the PPF.
In most cases these employers operate viable businesses but are classed as zombie employers whose profits will never fund the pension obligations owed to former employees.
Perhaps we now need to question seriously if accrued DB promises are “sacrosanct” or whether the system should allow for rights to be reduced or adjusted to avoid future PPF entry.
It is a sensitive issue, but it is important to note that pension promises only became sacrosanct relatively recently and by the imposition of legislation, in particular sections 67 and 75 of the Pensions Act 1995.
Before 1997 it was possible for a scheme to make retrospective amendments provided the trustees were satisfied that it was in the interests of the membership as a whole.
Indeed, until 2003 employers could terminate schemes with benefits being redefined by reference to the available assets of the scheme with employer debts being calculated on the minimum funding requirement basis.
Looking ahead, would aswitch from the retail price index to consumer price indexfor future increases, as mooted by the government for Tata Steel, be acceptable if the alternative were the PPF and capped 2.5% CPI only on post-1997 accruals?
What about schemes that provide fixed increases to pensions in payment granted when inflation was significantly higher than today – should they be allowed to scale back future increases to, say, CPI where the scheme is underfunded on the PPF’s funding basis?
I am not for one moment suggesting that we roll the clock back to pre-2003 but an informed debate on the extent to which benefits could be adjusted is definitely on the cards.
Duncan Buchanan is the outgoing president of the Society of Pension Professionals and a partner at law firm Hogan Lovells
