23 June 2017
The Pensions Institute has just published another fascinating contribution to the debate on stressed DB pension schemes. 'Stressed schemes' are the many schemes which are supported by employers who actually probably can't afford to do so. This is a problem for UK plc that isn't going to go away and my view is that all of us who work in the pensions industry should be engaging more actively in this topic to ensure we do the best for pension scheme members and for UK businesses. I therefore very much welcome this paper which is co-sponsored by LCP.
In 2015, the Pensions Institute’s first report on this topic, ‘The greatest good for the greatest number’, kick-started the debate on stressed schemes (and coined the phrase). The timing proved prescient – BHS and Tata Steel hit the headlines soon after.
For the vast majority of DB schemes, it is right that trustees and employers agree robust funding plans to deliver the promised benefits in full to members. But for the estimated 1000 stressed schemes in the UK, where the sponsoring employer may otherwise go bust in its attempts to support the pension scheme, the report argues that it is time to face up to the facts.
The Pensions Institute urges the Government to embrace a cultural shift in UK pensions policy, from one where full benefits must be pursued in all cases, towards a more nuanced policy that seeks the greatest good for the greatest number. For stressed schemes, a second-best outcome should be sought that balances the interests of members, the employer, the current workforce and other stakeholders in the business. Ultimately, the report argues, this will benefit UK plc to the tune of billions of pounds in economic value that would otherwise be lost.
Thinking has definitely been evolving in this area. Indeed, in the Pensions Regulator’s 2017 funding statement, the Regulator says it expects trustees of stressed schemes to reach the best possible funding outcome, taking into account members’ best interests. Is this a subtle steer away from the historical focus on targeting full benefits in such circumstances?
So, how do we actually go about delivering these second-best outcomes and bring about the “greatest good” for members of stressed schemes? Ideas vary. For example, the Pensions Institute argues for stressed schemes to have access to an easier-to-use form of the so-called 'Regulated Apportionment Arrangement' (RAA). This is the current mechanism that has been adopted in some tricky cases to separate a DB scheme from a struggling employer. The report says RAAs are currently too difficult, have only limited application and are too expensive. If the Government does consider any changes, I am certain that it would want to take extreme care not to open the floodgates to unscrupulous employers attempting to dump their pension schemes at the expense of other PPF levy payers.
Is there evidence that the regulatory environment may shift? Perhaps. Buried away in the Pensions Regulator’s own response to the Green Paper, the Regulator says there could be room for a separate mechanism allowing for the separation of the employer and scheme on the basis of scheme viability rather than simply on employer insolvency. A streamlined RAA that could help resolve the current impasse? I await the Government’s next steps with interest.
Find out more about The Pensions Regulator's expectations around DB funding in our News Alert.