DWP's DB Pensions White Paper: Hopes and Fears
13 Mar 2018 - Estimated reading time: 5 minutes
Our hope and expectation is that the white paper will be a good thing for DB. We expect it will be directionally supportive of achieving better value for money and of improving pension outcomes for the 1m pensioners that need it most. We do not think that any mandatory form of consolidation or change to regulations is required.
Our hopes for the majority…
Most schemes expect to pay pensions in full. The question is how to do it. If there is one simple thing that would help actively stimulate better value for money it would be the introduction of a DB chair’s statement. This would take the lead of the DC world where this is now commonplace.
This could be the basis for asking trustees to consciously consider why their current operational model and governance offers their members great value for money. This would naturally require a consideration of alternative ways to deliver members’ pensions and would either re-affirm or improve operations and governance. It would also stimulate commercial innovation and competition to deliver better member outcomes in new ways. Download our recent white paper for insights into the role DB scheme consolidation could play here.
Our hopes for the minority…
There are around 600 schemes that the PPF have reckoned will struggle to pay pensions in full covering 1 million pensioners. For these pensioners, we hope and expect that the white paper will be supportive of commercial consolidation. This is a form of innovation aimed at improving outcomes where sponsors will struggle to pay members their full pension.
It involves additional capital being injected in to pension schemes to increase the chances of paying pensions whilst also generating returns for the capital providers. This is often only possible with sufficient scale – by aggregating a number of pension schemes – and will offer members a much higher chance of receiving their full pension.
With Brexit soaking up all political bandwidth we do not anticipate any material regulatory change in the near term. Lack of regulatory change is not necessarily a bad thing as we also do not believe it is required to achieve better outcomes for pensioners. However, the fear then is that there is planning blight, and more importantly an action blight. This could result from any signal of future regulatory uncertainty such as a protracted consultation around commercial consolidation.
If there is regulatory uncertainty – this will stifle innovation, and the sure losers here are the pensioners.
Our view is that, through appropriate engagement with the Regulator, the PPF and all other stakeholders – commercial consolidation solutions will emerge. They will emerge within the boundaries of current regulations. However, if this process of innovation identifies barriers to better outcomes for pensioners then clearly these should be addressed in due course.
There will be a sigh of relief from trustees and scheme members if, as indicated previously, there is no mention of a wholesale move from RPI to statutory minimum increases. However, rationalisation of increases through a move from RPI-CPI for all schemes may not be not off the table. It’s worth remembering that the majority of schemes expect to pay pensions in full. A mandatory move to CPI would deliver a c£200bn pensions blow to 11 million pensioners for the sake of modestly increasing the chances of around 1 million receiving a slightly better pension than they would get in the PPF. That’s more than double the top end estimate of what the ultimate Brexit divorce Bill will come in at. That doesn’t feel right. Or if we look at it from the perspective of individuals, that’s 11 million pensioners that will be £20,000 poorer over time.
We may also see conditional indexation, which would enable schemes in dire straits to stop paying pension increases for a limited time, until scheme funding and business performance recover. This comes with a hefty risk warning and would need watertight safeguards. For example, the suspension of pension increases should be temporary and with strict restrictions on employers (such as dividend freezes and substantial pension contributions) to align business and scheme members interests. Another safeguard would be forcing schemes to reinstate lost increases before they could be wound up. These options should only be available to genuinely stressed schemes.
However, it’s arguable whether additional complexity and flexibility at the margins such as this would make a real difference, even if the unintended consequences were well managed. There is already significant material flexibility available in the funding regime (e.g. to take a contribution holiday in principle whilst companies are recuperating). So that begs the question, why do it?
And finally, overall our view is that the Pensions Regulator has sharp enough teeth. What’s needed are well exercised jaws!