Despite hundreds of billions going into defined benefit pension schemes over the past 15 years deficits have reached record highs. Recent high profile cases, such as BHS and Tata Steel, have put DB into the spotlight more than ever. This has prompted the Government’s Green Paper into the security and sustainability of defined benefit pension schemes, considering this very question and calling on the industry for their views.
DB schemes pose a serious risk to the health of some businesses and member benefits no longer come with a cast iron guarantee. To secure a better future for DB a change in approach is needed.
The closing date for issuing responses to the DWP was 14 May 2017.
While we would agree with the DWP’s summary that DB schemes are affordable to most, we must not overlook the fact that there is still considerable risk in the system. For a significant minority of schemes the security of the benefits promised is at risk. While the majority of employers should be able to continue to fund their schemes and manage the risks they are running, DB benefits no longer come with a cast iron guarantee. Indeed the Pension Protection Fund’s (PPF’s) modelling suggests that in the worst 10% of outcomes around 1000 sponsors could be insolvent by 2030.
With members losing £50k of benefits on average on entry to the PPF, we believe the status quo is leaving too much down to chance. There is a much better approach. One that maintains affordability for sponsors, reduces cash uncertainty and significantly improves the security of members’ benefits. Read our research in full to see how the security of DB pensions can be measurably improved, by adopting new strategies which flow from taking a fully integrated approach to risk management, genuinely integrating investment, contribution and covenant. Importantly, strategy is driven by the probability of being able to pay pensions in full, as opposed to looking through the narrow lens of deficits and discount rates.
As a strategy, simply pouring more money into schemes has not worked for the last 15 years. On that basis, it is fair to assume it won’t over the next 15.
Jon Hatchett - Head of Corporate Consulting
Overall, affordability is not a systemic issue across UKDB. Therefore we do not believe cost-reduction to be the number one priority for those managing DB schemes. Rather, some are exposing themselves to too much risk and as a result unnecessarily putting members’ benefits at risk.
Calum Cooper - Head of Trustee DB