James Phillips explores the diverse range of responses to the government's green paper on sustainability and affordability of defined benefit schemes.
The issues of indexation, consolidation and scheme governance were laid bare in the Department for Work and Pensions' (DWP) defined benefit (DB) green paper in February.
Despite the disruption caused by the calling of a snap general election last month, the consultation period has wound up, and the department will now begin considering the responses.
The paper could see far-reaching changes to the DB landscape, including for The Pensions Regulator (TPR) and Pension Protection Fund (PPF).
The proposals and issues within the paper have been somewhat divisive, and many have questioned whether any action is indeed needed.
The DWP's green paper rejects some views that there is a major problem with funding, arguing "there is no evidence of an imminent crisis" affecting DB sustainability.
Yet, Cardano chief executive Kerrin Rosenberg worries the department might not have considered true stress environments and therefore its numbers may be wrong.
"The analysis has not really looked at a proper stress environment," he says. "In a recession or financial crisis, which we might live through in the next five years, what would happen?
"If you follow that analysis, you have a fragile system with thousands of funds at risk. The PPF would be unable to cope with the volume knocking at its door. We've got to be willing to allow the benefits to be cut to a more realistic level."
He suggests the industry consider the potential downturn of events like the financial crisis, even if the chances may appear slim, to prepare in case of misfortune.
Redington head of DB Dan Mikulskis disagrees, stating that just a minority are at risk and that efforts should be focused on improving that area.
"While clearly we would all wish for 100% of member benefits to be protected, we would not say the system is somehow broken," he says. "However, even a number as high as 80% or 90% is still a lot of payments that are not going to be made."
Most notably, the green paper suggests distressed schemes could be allowed to halt any pension increases for a short period to put them on the path to better funding - known as conditional indexation.
However, the DWP's proposal has not convinced all, with many wondering what "distressed" entails. Redington's Mikulskis, for example, is particularly worried about the moral hazard issues it could introduce.
"You are weighing up the cases where you can get a second-best outcome versus the moral hazard risk you introduce being abused," he argues. "We need to be persuaded the benefits are worth the moral hazard.
"That would require a lot more work and a detailed study in an objective way to identify the schemes where the second-best outcome would actually be good."
The moral hazard issues could be dodged more simply, however, if there was a statutory override converting all schemes from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) in one fell swoop.
Punter Southall says the government should just convert all legislation from RPI to CPI and allow pension schemes to follow suit.
The consultancy's principal and technical director Joanne Livingstone says: "We have a situation where RPI is dubbed statistically flawed and is being used when the government is receiving but not when they are paying. It is confusing to have these two indices and for a pension fund it's really important you can match what you need to pay out with the right share of income.
"That's why it is important to get CPI-based instruments out there in the market. Trying to maintain these different levels of inflation when gilts are based on RPI but pension promises are based on CPI seems to be untenable."
The green paper stepped back from suggesting mandatory consolidation but did recognise some of the perceived benefits of doing so: lower costs, improved governance, and greater access to a wider range of investments.
Cardano's Rosenberg believes uncommon regulated apportionment arrangements (RAA), which split a scheme from a sponsor, should be more widely available. These schemes could be then consolidated into superfunds - similar to a proposal put forward by the PLSA in March.
"RAAs are an exceptional process where you have to wait until the company is about to die," he continues. "We need a more structured RAA process where those rules and parameters get defined in advance. You'd need a regulator to oversee it, but this could be a more flexible option."
However, SEI believes the DWP has the right conclusion, arguing that consolidation is not the only way to get these outcomes. Unsurprisingly, as a fiduciary manager, it argues that its services can offer the same benefits.
Its managing director for Europe, the Middle East, Africa and Asia Patrick Disney says fiduciary management has proven it can provide the benefits that consolidation is mooted as offering.
"The government is trying to get better outcomes, and it's no surprise it is taking a focus on this, because there are clear benefits of having larger pools of assets," he says.
"There's a binary decision: you either have to merge, or go to an aggregator like a fiduciary manager. To achieve these goals, you have to do one of these two things."
The government's comments on its green paper may be delayed by the election, but it has given the department time to mull over the diverse opinions submitted. Yet, is the government likely to act on some of these points when it knows the industry is so split?
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