Richard Favier thinks fears of a funding crisis in DB schemes are overblown but says, if he is wrong, a 'Super PPF' could well be one of the solutions considered by policymakers.
I hear a lot of people going on about how many seriously underfunded defined benefit (DB) schemes there are out there in the market. Anyone would think Armageddon will be upon us shortly and the Four Horses of the Apocalypse are trotting up a road near you or even your road this afternoon; that is, if they aren't already outside your front door now!
Personally, I think most of the schemes will recover their funding position when interest rates improve and the perfect storm that came to rest over our DB schemes moves away from the UK; subject to a decent Brexit!
Provided an employer can and is expected to continue to afford its proper scheme contributions, there is no need for anyone to worry about the size of the section 75 (full buyout) debt at all. The position is not unlike that of a householder, who has a huge mortgage debt on their house, which they could not possibly pay off all in one go - like most of us reading this article. Provided we can afford the instalments, there is no need to worry about the actual debt itself. Clearly that does not apply if an employer is in serious financial difficulty and therefore the contributions are unlikely to continue being made. In those cases, the sooner reality is recognised and something done to find a solution, the better will be the outcome for everyone!
But, if I am wrong and we really are all going to hell in a handcart, there is a solution that could improve the lot of most, if not, all members of DB pension schemes. After a period of two years (to allow trustees, members and employers to sort themselves out):
- Any scheme funded below Pension Protection Fund (PPF) levels would go into the PPF and PPF benefits would be paid.
- Any scheme funded above the PPF would go into a newly created 'Super PPF', which would then pay a common level of benefits (i.e. all of the expensive benefits would be pared off to make the benefits to be paid much more affordable) unless the scheme does not want to go into the Super PPF.
- Those schemes that choose to stay out of the Super PPF would lose the benefit of both PPF and Super PPF entry/protection.
- The employers would still have to pay the contributions they would have had to pay had the pre-existing situation continued (they are no worse off but their staff have more pensions security).
- The PPF and the Super PPF would then be merged (with a two-tier level of benefits) for greater efficiency, with one common set of rules for each of the PPF benefit members and Super PPF benefit members. The cost savings would be very significant.
People will no doubt scream blue murder at such a proposition, but the modest disadvantage suffered by some would have to be weighed against the assurances and ultimately better (or no worse) benefits, which everyone will otherwise get.
My view is that things will be fine as they are, provided those trustees who keep kicking the problem of underfunding into the long grass (despite knowing that their employer will never be able to honour its commitment to scheme members) face up to their responsibilities and deal with that issue. But if you believe the end of the DB pensions world, as we know it, really is just around the corner, better we all do something positive now. If your employer can't ultimately pay, you won't get full benefits anyway.
The doom-mongers among us should be careful for what they wish for. Someone with the power to legislate might just believe what you are saying and conclude they should put in place a solution a bit like the one set out above. You have been warned.
Richard Favier is a trustee representative at Dalriada Trustees
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