Graham Vidler highlights the key difficulties faced by defined benefit schemes.
The recent news that the Bernard Matthews' defined benefit (DB) pension scheme is likely to enter the Pension Protection Fund has rounded off a tumultuous six months in the pensions' world. Starting with the inquiry into the collapse of BHS through Brexit and the Bank of England interest rate cuts, the DB landscape has felt a strong current of uncertainty running through it in recent months.
It's too early to call the medium and long-term ramifications of Brexit, the short-term impact has been uncertainty and huge volatility in markets. The pound has fallen sharply and gilt yields are at record lows, the Bank of England has cut interest rates further and introduced another round of quantitative easing.
These short-term impacts show up in the deficits reported in the Pension Protection Fund 7800 Index. At the end of August the aggregate deficit of the 5,945 DB pension schemes is estimated to have increased to £459.4bn, with 5,042 DB schemes in deficit. Uncertainty certainly describes the current political and economic situation.
There are a number of difficult challenges facing DB pension schemes which will need further, in-depth analysis. Of course this will take time and will be made all the more uncertain by further developments that will also affect DB pension schemes.
Earlier this year, the Work and Pensions Committee, chaired by Frank Field, began its inquiry into the collapse of BHS. Commenting on the inquiry Frank said: "The lessons of BHS must be learnt. This may mean strengthening the powers and resolve of The Pensions Regulator (TPR) to act early, quickly and firmly with those who seek to avoid their pension responsibilities."
Following the BHS inquiry, the Committee announced that the adequacy of TPR's powers would form part of its new inquiry. The Committee will examine where the regulator should be given more powers to prevent companies from evading their pension responsibilities.
In particular the committee is asking whether TPR's powers over recovery plans are sufficient and whether companies should have to seek clearance from TPR before doing deals with other businesses with pension schemes.
Given the current DB landscape, the ongoing work of the Defined Benefit Taskforce, launched by the Pension and Lifetime Savings Association (PLSA) last March, is even more pertinent.
Over the last six months the taskforce, which is made up of industry experts and academics, has been seeking views and evidence from schemes of all sizes, as well as sponsors, regulators, government and intermediaries, to get to the heart of the issues affecting DB schemes.
The taskforce has been examining the tough issues, such as the impact of funding challenges, the distribution of risks in the sector and the potential impact on member benefits. It's also been looking at the broader impact on the wider economy, on businesses, on growth and intergenerational equity. The Interim Report findings will be published at the PLSA's Annual Conference and Exhibition in Liverpool from 19-21 October.
There are a number of difficult challenges facing DB pension schemes that will need further, in-depth analysis. Of course, this will take time and will be made all the more uncertain by further developments that will also affect DB pension schemes.
When will article 50 be triggered and how will UK pensions fit into the discussion? What impact will ongoing economic uncertainty have on DB schemes? Although we can't answer those questions now, what we do know is that the DB Taskforce will be setting out what the main challenges are facing DB schemes and the areas we should be exploring to address these areas most effectively.
With this insight, the PLSA can work with industry and government to ensure the foundations of DB schemes are less compromised in the future.
Graham Vidler is director of external affairs at the Pensions and Lifetime Savings Association
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