Broadstone Pensions

The best use of our resources

The trickiest balancing act that The Pensions Regulator (TPR) is forced to try to perform is ensuring that the three participants in the scheme funding zero-sum game are treated equitably. The interested parties are:

  1. Members’ scheme benefit promises
  2. The Pension Protection Fund (PPF)
  3. Employers with their “sustainable growth” aspirations

It is clear that, when considering a framework to support any single one of these parties, one or the other is in direct conflict. I don’t envy TPR having to balance all of this.

However, there has been much commentary on the impact of the funding code and an anticipated race to de-risk (I prefer Jo Cumbo’s more alliterative dive to de-risk). TPR would rather be in a position where pension scheme deficits no longer swing as much as they have over the past decade, seemingly impervious to the contribution that sponsors have pumped in. Reaching a more stable position could be a long and difficult/expensive process for many schemes. And by “schemes” I mean the collective of members, trustees and sponsors. The majority of the pain will be expected to fall on the sponsor during that journey. However, this blog isn’t about that journey per se and its impact on employers, but rather the other two riders on the metaphorical see-saw, the PPF and the members (my son decided they’re called see-sawers).

I think we can agree that the impact on the funding code means that employers will have to pay some extra billions into their pension schemes over the next 10 years. Picking a number at random let’s say this is £60bn over 10 years (who knows what the number actually is). We have to consider whether we’re happy that the money spent is improving the position for everyone (our see-sawers).

The PPF

Will this level of contributions significantly reduce future claims against the PPF? Many employers will be expected to pay an accelerated rate of deficit recovery contributions under the new Code, which may well prove too much for them to bear and some of these employers will fail. Jobs will be lost and other trading partners will be adversely affected. Is this a desired outcome when prioritising protection of the PPF? Is it necessary, and crucially, will it improve member outcomes?

Members’ benefit promises

How much additional benefit security is provided for those extra £bns? Put simply, how many members would get more than they otherwise would? Consider the outcome in which employer and scheme continue, with a Target End State of PPF+ (at worst) or full buy-out (at best) vs employer failure with PPF compensation. In the latter case, members will simply receive the same benefit regardless of the funds paid in. Before encouraging more funding for the sake of it, can we estimate how much, overall, will be gained for members? Probably not, but understanding how much we can expect member outcomes to be improved overall by our £60bn of accelerated contributions is an important consideration.

Increased contributions and de-risking should ultimately lead to lower PPF levies in the longer term, but at what cost in the short term? Those schemes with the worst funding position and weakest employers are already paying the highest PPF levies.

Employer sustainability

We know many employers cannot afford to pay more. Will this be the straw that breaks their back, providing no improvement to benefit security but creating greater risk of a PPF claim? The dreaded concept of PPF drift is again at the fore and is not being adequately addressed. Linked to this is the knowledge that some businesses will inevitably fail, in part at least, thanks to their scheme (the so-called Zombies); is there a more effective way of identifying and dealing with these, without ‘infecting’ others with more to lose and little or nothing to gain from the proposed changes?

We know that employers only have a finite amount to spend on their DB promises. We have to ask ourselves a very difficult question – should we begin to fund for increased benefit security for DB scheme members only where the realistic aim is (if our see-saw works) that they receive something better than PPF benefits (aka PPF+)? Perhaps we would be better to acknowledge that this money could perhaps be better spent on additional contributions for those employers with DC schemes whose members are currently likely to receive much less.

These questions are difficult and the answers may not be known. We often talk about unintended consequences of regulation and legislation. The real risk is that the drive to increase member security and protect the PPF may only partially realise this but at an unpalatable or unnecessary cost. I hope TPR takes the time to consider this during their cogitation of part 2 of their consultation.