Call for pension ‘superfunds’ to tackle £400m DB scheme deficit

The Pensions and Lifetime Savings Association (PLSA) is calling for changes to the regulations surrounding defined benefit (DB) pension schemes, after research found over a third of members are in schemes which have only a 50:50 chance of delivering all their benefits

It wants action to tackle the current £400bn DB pension deficit and the challenges of underfunding, weak employer covenants and lack of scale.

The association says 11 million people in the UK depend on DB schemes, and while most will be able to reach a sustainable funding position by drawing on their resources and the financial strength of their sponsoring employer, others will not.

PLSA says over two-thirds (77%) of employers it surveyed believe that there are challenges to running DB schemes. It found many employer covenants to be under pressure, while three million members in the weakest schemes only have a 50:50 chance of receiving their full benefits.

Its report on potential options that could help schemes improve their performance and the probability of members seeing their benefits paid in full makes three main recommendations.

The first is a new chair's statement for DB scheme trustees, designed to demonstrate that they are operating in line with best practice in areas such as governance, investment performance and cost transparency. The PLSA says this would also provide the cultural impetus for trustees to consider consolidating services, investment or governance where it offers the prospect of improved outcomes for their members.

Secondly, the association wants the government to make it easier to simplify the tens of thousands of different benefit structures currently used by the UK’s 6,000 DB schemes, in order to standardise benefits.

The third proposal involves new measures to help schemes backed by weaker covenants. The PLSA says such schemes could benefit from turning the uncertain promise of future support into tangible funding. In exchange employers would be released from their obligations and schemes could then transfer into newly created ‘superfunds’. Trustees would have a new choice beyond PPF and buy-out and the PLSA says its research indicates this would be affordable and attractive to many employers and attractive to many trustees.

Amongst surveyed employers, almost two-thirds (65%) said they would support the principle of consolidation with particular support for shared administration (72%), shared external advisers (66%), shared governance (64%) and pooling assets under one asset manager (54%).

The DB taskforce modelling and analysis suggested that superfunds would free up member resources and of those businesses who knew what they would invest in should they take this step, 49% of employers said they would invest directly into their employees via benefits and 28% would invest in business growth.

Ashok Gupta, chair of the PLSA DB taskforce, said: ‘Our proposals have the potential to transform the industry – helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses. The industry and government need to grasp this opportunity and tackle serious flaws that threaten the security of people’s retirement.’

Rob Yuille, head of retirement policy at the Association of British Insurers, said: ‘The PLSA’s DB taskforce proposes some important reforms and we look forward to seeing further details about the recommendations. In particular, further clarity is needed on the proposal to create superfunds, specifically how they would be regulated.

‘Superfund members should be afforded the same level of protection and peace of mind that is already given to insurance customers by the Solvency II rules, so that there is a level playing field and it is clear who bears the risk of paying the benefits.’

The PLSA Defined Benefit Taskforce Opportunities for Change report is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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