The Pensions and Lifetime Savings Association’s Joe Dabrowski offers a glimpse of what the organisation will say in its response to the government’s defined benefit green paper.
The team heard from a variety of members representing schemes of all sizes who were keen to share what they saw as the challenges facing DB schemes.
Overall, members showed great support for the government’s willingness to engage with the challenges ahead.
There was a desire among our members for the regulator to ensure its policy positions are followed through by case workers to the schemes they offer advice to
However, their day-to-day experience suggested that there is much more risk in the system than the green paper implies, as it relies heavily on analysis that makes assumptions that employers will continue to pay record levels of deficit recovery contributions and gilt yields returning to highs of 4 per cent.
The experience echoes the findings of the second DB taskforce report, which was launched in March. The report – ‘The case for consolidation’ – highlighted that many employers and schemes are under considerable strain, and that an estimated 3m members in schemes sponsored by weaker employers have only a 50 per cent chance of seeing their benefits paid in full.
Regulator should have supervisory function
The role of the Pensions Regulator is valued by members. However, there was consistent feedback that a more robust use of its existing powers, especially to intervene in cases where it is clear a scheme and its sponsoring employer is failing its members, is necessary.
A regulator with a more supervisory focus, with less emphasis on producing guidance or ‘micromanaging’ the day-to-day decision making of schemes, with a greater focus on inputting good scheme governance, would help to boost member protection.
There was also a desire for the regulator to ensure its policy positions are followed through by case workers to the schemes they offer advice to.
Protections needed for index switches
The question of indexation is always a hot topic in pensions, and the roadshows were no different. Many pension schemes have retail price index hardwired into their scheme rules, in what has become known as a drafting lottery.
DB green paper: Can it strike a balance?
Video: What do businesses say about the defined benefit green paper's focus on regulation, and where do unions have concerns about member protection? Rachel Smith, principal labour market economist at the Confederation of British Industry and Tim Sharp, policy officer at the Trades Union Congress, give their views.
The position is complicated by Office for National Statistics reviews that have dubbed the RPI an essentially faulty statistic and the fact that, generally speaking, a scheme based on RPI indexation is more expensive to provide.
The government’s green paper proposes a statutory override to allow schemes to move from RPI to consumer price index or another index.
Some members raised concerns about this move as they felt it might result in a situation whereby their employers would put pressure on them to make the switch.
Balancing this complicated issue is difficult, but we are supportive of the statutory override and the end to the drafting lottery.
However, we believe the regulator needs to provide protections that include guidance on when it is appropriate for trustees to make the switch, ensuring it is in the best interest of scheme members.
Joe Dabrowski is head of investment and governance at the Pensions and Lifetime Savings Association
