Fixing the issues with DB pensions schemes
Graham Vidler, December 06, 2016
The PLSA has revealed structural weaknesses in the DB sector, and gives ideas of how to fix them
It’s been well-documented that the vast majority of DB schemes face significant challenges – driven by a combination of social, political and economic issues that are having a profound effect on the funding levels of DB schemes.
Longevity, low interest rates and quantitative easing all put DB schemes under extraordinary pressure. The £459 billion deficit question is: 'what can be done to solve the problem of DB funding?'.
The Pensions and Lifetime Savings Association (PLSA) launched the Defined Benefit Taskforce in March to examine tough issues such as the impact of funding challenges, the distribution of risks in the sector, and the potential impact on member benefits. The underlying question posed by the Taskforce was ‘can we do better for the millions of people relying on these schemes, the businesses that support them, and the economy at large?’.
At our annual conference in Liverpool Ashok Gupta, chair of the DB Taskforce, presented its interim report. It identified a number of long-term structural weaknesses in the makeup of the sector, including the diversity of size, scale and governance of schemes; the fragmented value chain; and the broader legislative and regulatory framework.
As a consequence of these weaknesses and the wider economic environment employers find themselves running faster and faster to stand still. In 2015 alone employers paid approximately £31 billion into their DB schemes. However, £11 billion of that was in deficit recovery contributions.
Despite huge additional contributions to DB schemes deficits have grown from £22.5 billion in 2006 to more than £400 billion in 2015. The current system is not working as effectively as it could. Using the analysis of the Taskforce, and the structural weaknesses it identified, we believe there are four areas where policy interventions could focus to improve the system:
- The current system is too fragmented. Work should be undertaken to investigate the potential for scheme consolidation, which could help secure more economically viable schemes better able to deliver value to scheme members and their sponsors.
- The current regulatory approach to scheme resolution is inflexible. Work should be undertaken to investigate how changes to the system could deliver better solutions to scheme resolution and remove regulation that adds cost but has little or no tangible benefit.
- The current approach to benefit design and benefit change is rigid. Work should be undertaken to investigate how a more flexible approach to benefit design could be implemented to help sustain schemes.
- The current approach to pension scheme risk bearing is sub-optimal. Work should be undertaken to develop better measures of benefit risk.
It’s clear the current system is not working well. It has built up over decades and is not fit for the future.
The findings of the interim report show that DB pension schemes are under severe pressure and without change the likely outcome will be hardship for members or sponsoring companies. There is also a clear economic imperative to address the issue for the benefit of individual scheme members, employers and the wider economy.
DB schemes hold assets of £1.5 trillion under management and there are almost 11 million DB scheme members in the private sector alone. DB schemes have the potential to benefit the economy and be a force for social good. Yet the window of opportunity to make a meaningful difference in the sector is closing as schemes mature.
We encourage and welcome anyone who has a stake in the future of defined benefit schemes to work with us. Further information on the Taskforce, along with a copy of the interim report, is available on the PLSA website.
Graham Vidler is director of external affairs at the Pensions and Lifetime Savings Association. HR magazine is a media partner of the PLSA Annual Conference