As the deadline for submitting views on defined benefit to the Work and Pensions Committee has passed, experts say there is a need for greater flexibility, potential benefit reductions and increased powers for the Pensions Regulator.
Last month, the committee said it would consider the regulator’s powers as part of its inquiry, an issue that has become even more prevalent following the collapse of retail chain BHS and proposals to keep the British Steel Pension Scheme out of the Pension Protection Fund.
There is a need to consider some sort of shade of grey. All or nothing, black or white, shouldn’t be the only option
Lynda Whitney, Aon Hewitt
Raj Mody, partner and global head of pensions at consultancy PwC, said the DB 'problem' is not new. “The industry got itself into a situation you wouldn’t design, and that has built up over a couple of decades at least.”
He said the difficulty was in coming up with practical and politically acceptable solutions that will not leave the burden “hanging around for another couple of decades”.
All or nothing might not be the only option
The debate requires members' interests to be weighed against those of businesses, other pension funds and potentially the general public.
Lynda Whitney, partner at Aon Hewitt, said it is crucial to “think about that balance between member benefits and employer viability”.
“Member benefits are currently very strongly protected, and the only time that members lose out is when the employer has collapsed and the scheme ends up in the PPF,” she said.
“That’s a very black and white situation,” and there is a “need to consider some sort of shade of grey, where it is in the members’ best interests to allow that degree of flexibility, and that all or nothing, black or white, shouldn’t be the only option”, she said.
Indexation, performance element and fixed obligation
In terms of allowing only a small amount of flexibility, one solution would be to allow a move from the retail price index to the consumer price index, Whitney suggested.
Alternatively, with a greater amount of flexibility, pension increases could be dependent on the performance of the plan, she said.
Furthermore, the employer obligation could be made “a fixed obligation rather than a very variable obligation that it is today”, Whitney added.
However, there would still need to be checks and balances before any of those things were introduced, Whitney said, noting that these options should not be available to employers capable of financing their deficit but who want to get out of providing what was promised.
“What we’d be looking for is something that the trustees and the Pensions Regulator can organise, rather than something that needs individual member consent,” she said.
Whitney also highlighted the importance of intergenerational fairness. “There is always that risk that this focus on DB… potentially distracts from [defined contribution],” particularly given that the majority of retirement saving takes place in DC nowadays.
Lowering pension increases
Jon Hatchett, head of corporate consulting at Hymans Robertson, emphasised that many schemes are well run.
“The low interest rate environment that we’re in has led to record deficits,” he said, but “the large majority of schemes are well managed and should be able to pay benefits in full, and so we’re not advocating for a change in the regulatory regime that would undermine those well-run schemes”.
However, there is "a significant minority of schemes who are going to struggle to pay benefits in full”, he noted.
Pension deficits can start to bear down on an employer by reducing its ability to invest in the business and, ultimately, perform.
If a company is struggling, partly due to its pension scheme, one way to try and relieve the pressure would be “to consider lowering the pension increases the scheme pays to members”, Hatchett suggested.
He said this would require “watertight safeguards”, adding: “It might just give schemes and companies breathing space, but still end up with members receiving more than they would from the PFF.”
Intervene before an employer becomes insolvent
Alan Pickering, chair of professional trustee company Bestrustees, said that when a sponsoring company “hits the buffers” the PPF will come to the rescue, but “it is often far too late to save the business”.
Select committee seeks views on expanding regulator powers
The Work and Pensions Committee is to consider amending the powers of the regulator and the make-up of the PPF as part of its ongoing inquiry following the collapse of BHS.
“We need to find a way that allows people to reach workable compromises before such a crash happens,” he said.
“I think that there is a role for the regulator, if it can be adequately resourced, to provide an arbitration route where employers and trustees can go to get their proposed compromises blessed, without necessarily incurring all the legal costs.”
