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DB under pressure – time to act, says PLSA Defined Benefit Taskforce

DB under pressure – time to act, says PLSA Defined Benefit Taskforce

20 October 2016, Press Release
  • Significant risk to scheme members
  • Benefits from schemes to the wider economy curbed
  • System working ineffectively

The Pensions and Lifetime Savings Association today (Thursday) published the interim report of its Defined Benefit Taskforce.

Defined benefit (DB) schemes are a social good and important to millions of people. Each year £81 billion1 is paid out in salary-related pension benefits across the public and private sectors, 4.27 million pensioners2 receive a private sector DB pension and in total 27.3 million3 people currently, or will, benefit from a DB pension. There are almost 6,0004 private sector defined benefit schemes in the UK and between them they hold assets under management of £1.5 trillion5. Yet more than 5,0006 of these schemes are in deficit. 

Launching the Taskforce’s interim report today at the PLSA Annual Conference, Ashok Gupta, Chair of the Taskforce, commented:

“The current state of DB poses a significant risk to members’ benefits for all but the most strongly funded schemes. This is especially true in an economic environment in which interest rates continue at their current ultra-low rates. The Pension Protection Fund helps mitigate these risks and plays a vital role in providing security for scheme members whose schemes have failed, but members still bear the risk the PPF does not cover. For many members the risk is they will lose 15-20% of their benefits7. And member awareness of this risk is extremely low.

“Employers are running to stand still. In 2015 alone employers paid approximately £31 billion into their DB schemes8. £11 billion9 of this was deficit recovery contributions – almost the same amount as the UK spent on foreign aid in 201510. That money could have been spent elsewhere in their businesses; for example on wages, business investment, dividends or on pension contributions to employees in DC schemes. 

“The current system has built up over decades but is not fit for the future. It’s time to act. Our analysis shows that the current inefficiency of the DB sector affects not just scheme members and scheme sponsors, but also the even greater numbers of people outside schemes. We can do better for the millions of people relying on these schemes, the businesses that support them and the economy at large.”  

Joanne Segars, Chief Executive, Pensions and Lifetime Savings, said:

“When the Taskforce started on this interim report our aim was to provide a solid base of analysis and research from which to work. We knew the economic environment, with QE and persistently low interest rates, was hostile for DB schemes and the DB system was not working effectively.  The Taskforce’s work has helped quantify the scale of the problem.  

“The system we have is not working as well as it could, it is inflexible and costly. It only allows for binary outcomes of complete success or complete failure; greater flexibility in the system may help to create better outcomes for scheme members. The system is also fragmented and the potential exists for consolidation to deliver better value to scheme members and their sponsors. 

“The next phase of the Taskforce’s work will be to collaborate across the pensions and investment sector with government, regulators, social partners and industry to develop solutions and recommendations to support the sustainability of DB – we encourage anyone who has a stake in defined benefit schemes to work with us.”

 

Findings and next steps

  1. 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.
  2. 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.
  3. 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.
  4. The current approach to pension scheme risk bearing is sub-optimal. Work should be undertaken to develop better measures of benefit risk.

The analysis supporting the interim report was led by the Taskforce, chaired by Ashok Gupta and experts from across the industry and academia. The Taskforce has actively gathered the views of stakeholders from across the pension community – schemes, sponsors, trustees, advisers and suppliers to schemes, scheme members, government and regulators.

A PDF copy of the DB Taskforce Interim Report can be found here.

 

Available for interview

Taskforce members, including Ashok Gupta (Chair of the DB Taskforce) and Joanne Segars (PLSA) are available for interview. Please contact the PLSA press office.

 

-Ends-

 

NOTES TO EDITORS:

 

FOOTNOTES:

  1. MQ5: Investment by Insurance Companies, Pension Funds and Trusts, ONS, September 2016. Covers private and all public sector schemes (funded and unfunded).
  2. Private sector only, Purple Book – DB Pensions Universe Risk Profile, The Pensions Regulator and Pension Protection Fund, December 2016.
  3. Occupational Pension Scheme Survey, ONS September 2016. Covers private and all public sector schemes (funded and unfunded).
  4. PPF 7800 Index Update (August 2016), PPF, September 2016.
  5. PPF 7800 Index Update (August 2016), PPF, September 2016.
  6. PPF 78oo Index Update (August 2016), PPF, September 2016.
  7. DB Interim Report, ‘PPF Underpin’, page 22.
  8. MQ5: Investment by Insurance Companies, Pension Funds and Trusts, ONS, September 2016.
  9. MQ5: Investment by Insurance Companies, Pension Funds and Trusts, ONS, September 2016.
  10. House of Commons Library briefing, No 3714. 

 

CONTACTS:

Lucy Grubb, Head of Media and PR, Pensions and Lifetime Savings Association
T: 020 7601 1726, M: 07713 073 023, E: [email protected]

Babak Mayamey, Press Officer, Pensions and Lifetime Savings Association
T: 020 7601 1718, M: 07825 171 446, E: [email protected]

Kathryn Mortimer, Press Officer, Pensions and Lifetime Savings Association
T: 020 7601 1748, M: 07901 007 713, E: [email protected]