The DWP recently consulted with the industry on options for Defined Benefit schemes in respect of returning funding surpluses to sponsors and the role a public sector consolidator could play.
Below is an extract from the Executive Summary of our full response.
Treatment of scheme surplus
In considering the options to make it easier for schemes to pay out surplus assets, we largely welcome the proposals being put forward. Currently, there are some significant barriers to making payments of this kind and these would need to be addressed to achieve your aims.
However, we do question whether paying out surplus assets will be appropriate that often. For many trustees, their schemes are unlikely to generate large enough ongoing surpluses to make this action worthwhile given the lower risk investment strategies generally in place.
Even where permitted under the revised DB funding regime, many employers and trustees will be wary of materially re-risking their investments now given their histories with funding regulation and end-game plans for their scheme. It would take some time for the institutional memory of contribution holidays and benefit improvements followed by record deficits to fade, and for a new culture of sharing surpluses to take hold.
A minimum threshold for starting discussion on surplus extraction would appear most consistent with your stated objectives. However, it would need to be coupled with strong support for trustees in being able to set a higher bar that reflects their scheme specific circumstances. We would want to see clear guidance for trustees from The Pensions Regulator (TPR) and the government as part of any change in pensions regulations.
Introducing a statutory override to enable surplus extraction would be a pragmatic solution to the rules lottery we have at the moment. However, we still see practical barriers to making one-off payments to members, not least the Byzantine tax rules, as more important for government to address than restrictions in scheme rules.
We do not see the 100% PPF underpin to be remotely attractive to schemes if the super levy is anywhere close to that suggested by your initial analysis. Although we understand the reasons why such insurance would be costly, a £300,000 annual premium for a £50m scheme would be unaffordable and employers would likely have better uses for these funds.
Model for a public sector consolidator
We believe that the proposals outlined have merit and that a public sector consolidator would help many of our clients achieve their long-term goals more quickly.
We note that the aims of the consolidator will be to:
- Provide a solution for schemes unattractive to commercial providers
- Ensure members’ interests are protected
- Increase levels of investment in high-growth UK assets
- Minimise potential distortions of the commercial provider market
We welcome the focus on those schemes that are unable to freely access the current commercial provider market and the important emphasis on member benefits security.
We understand the wider objectives of the government to encourage investment in UK plc and to not unduly disrupt the current commercial provider market. In our response, we highlight some of the conflicts between these objectives and the significant challenge in balancing these aims.
The key challenge for the consolidator will be in setting the terms of entry, and how schemes are to be excluded, if at all. Whilst we agree that there is a need for a consolidation option for those schemes that cannot currently access this market, we believe the price of entry should be fair.
The proposal to offer standardised benefits is an obvious solution to many of the issues facing schemes looking to transfer to a commercial provider. We would argue that this approach should be an affordable and pragmatic solution for all schemes, irrespective of whether they intend to enter a public sector consolidator or not.
Finally, one of the key factors to determine the success or failure of the consolidator will be the level of underwriting provided and how quickly it can achieve sufficient scale. We do not see any realistic option other than government backing to this project.
We recognise the political risk in asking taxpayers to underwrite private sector DB pensions. This is one of several reasons why we believe that entry for underfunded schemes should be deferred at this stage. However, government underwriting would help achieve its aim of increasing investment in productive finance.
You can access our full response here
