Hilary Salt says rather than designing new DB superfunds, wouldn't it be better to grow to appreciate and improve our existing superfund?
It must be frustrating for the Pension Protection Fund (PPF) when the public perception is that to end up in their scheme is a disaster. The PPF was introduced to protect pension scheme members whose employers fell into insolvency without being able to buy out member benefits in full. It plays an important role in protecting scheme members at a stressful time - a time when some will have lost their livelihoods.
The last thing these members need is to be told they have also lost their pension - and yet this is the impression they are given by many press commentators - in both the general and specialist press.
I remember hearing two BHS Pension Scheme members being interviewed on Radio 4's Today programme saying they had lost everything (this was before the scheme rescue.) I wanted to sit down with them and explain that while they would have lost some of the value of their pension, they were protected by the PPF and would receive a large part of the pension they expected. And my bet is that even after losing some of the value of their defined benefit pension, they'd be significantly better off than they would have been had they been in a typical defined contribution scheme and lost nothing.
So I think we need to learn to love the PPF a bit more.
Having said this, there are some problems we should discuss to see if we can provide an even better safety net.
The PPF often says it's funded from two sources: the levies paid by continuing schemes and the assets received from schemes that enter the PPF. (As an aside, the PPF can profit from schemes entering - so new insolvencies are not necessarily a disaster for the PPF either.) In fact the PPF has two other sources of funding - first from the investment income on its assets and second from the fact that members entering the scheme have benefits taken away from them so reducing liabilities and improving the funding level. Now we've lived with the PPF a while, I'd say it's worth reconsidering these four different funding sources. If the PPF had a slightly less cautious investment strategy, the additional income could be used to reduce levies and/or to remove the need to reduce member benefits.
My preferred improvement to the compensation offered to members would be to give them limited increases on the benefits built up before 1997 if their scheme had promised them increases on these benefits. Removing pre-97 increases has always seemed particularly arbitrary to me - and surely a limitation that could be subjected to an indirect age discrimination challenge.
And can we all stop pretending the PPF doesn't exist? It seems to me eminently sensible that trustees should take into account the existence of the PPF in planning the funding of their schemes. That's not to say they should act recklessly or imprudently knowing the PPF will pick up the pieces. But if they are nowhere near fully funded, isn't it reasonable for them to use sensible investment strategies to try to improve their position rather than buy bonds (or so-called 'de-risk'), lock in deficits and guarantee that they will never be able to pay benefits in full?
The PLSA seem to be concentrating their efforts on designing new superfunds that will allow trustees to cut benefits and employers to walk away. Wouldn't it be better to grow to love and improve our existing superfund instead?
Hilary Salt is founder of First Actuarial
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