Thirty years ago, assuring that members of pension schemes would enjoy security in retirement seemed straightforward. Even small employers offered Defined Benefit (DB) schemes, and funding problems were all but unknown. Today, in contrast, the situation is far more complicated and for many the outlook is bleak.
The Four Horsemen of DB pensions – Economics, Improved Longevity, Over- Regulation and Tax Raids – have left the UK’s network of funded DB arrangements with an uncertain future. Outside the Public Sector, few DB schemes remain open to future accrual. Employers and trustees aspire to buy-out, but this is a realistic objective for a precious few. For most DB trustees, the future represents a desperate struggle to make good deficits; for many, this represents an objective that will never be achieved. The threat of employer insolvency matched with an underfunded DB scheme is disturbingly common, with Palmer & Harvey becoming the latest in a growing list of examples.
Fortunately, the UK’s safety net has proved to be brilliantly resilient.
Since its inception in 2005, the Pension Protection Fund (PPF) has absorbed several hundred schemes, with the benefits of over 230,000 members having been transferred to the lifeboat scheme. However, Professor David Blake of the Cass Business School’s Pensions Institute has suggested that achieving sustainability will require more than a wellresourced PPF to protect the benefits of all DB members. He has suggested that as many as a thousand underfunded DB schemes will never repair their deficits and that in such cases it should be permitted for trustees and members to agree to the payment of scaled-back benefits – provided that benefits are still above those provided via the PPF. This suggestion has proved controversial, with many arguing that unscrupulous employers will simply find excuses to abandon their responsibilities. However, Tata Steel’s use of a Regulated Apportionment Arrangement (RAA) to separate it from the British Steel Pension Scheme (BSPS) could point the way for similar initiatives in future.
A recent Work & Pensions Committee inquiry asked if converting stressed DB arrangements to Collective Defined Contribution (CDC) schemes might also be a route to resolving DB funding problems. Whilst this is not an obviously viable option, it does demonstrate that alternatives continue to be considered.
Resolving funding problems for DB schemes continues to be a difficult challenge. There are likely to be a range of viable solutions, and the need for innovation is paramount. However, we should not abandon hope.