What does the future hold for DB schemes?

Nick joined Professional Pensions’ panel of experts to discuss the future for defined benefit (DB) schemes, against the backdrop of a rapidly changing environment and an avalanche of consultations and proposals from government and regulators.

He challenged the premise that smaller schemes produce worse member outcomes which appears to be driving the Pensions Regulators campaign to consolidate smaller schemes.  He questioned whether it is helpful to use the same metrics to assess smaller schemes as those used for larger schemes as they are often run quite differently.  It is also not clear that conclusions in respect of money purchase schemes can be easily translated to the defined benefit environment.

However, the Regulator should be judged on its actions rather than its words. Although, the direction of travel implied by the proposal to apply a penal adjustment to the administration levy paid by “smaller” schemes was a concerning start, common sense did eventually prevail. Practicality will be particularly important in respect of policing the new funding and governance regimes where proportionality has been ill defined. A heavy-handed approach by the Regulator could quickly become disproportionate and it is hard to understand to what end.

We would encourage the Regulator to always bear in mind the ultimate goal of improving member outcomes and to work with the industry and smaller scheme specialist, in particular, to effect change rather than trying to be an agent of change itself.  In rushing to make change there is danger of unintended consequences, such as losing the diverse pension ecosystem that we have at the moment with a range of different types of schemes, providers and sponsors who have excelled at coming up with practical and commercial solutions to problems.  A lot of changes have happened recently and now it is time to take a step back and let the industry digest and react without undue interference.

That being said, there are two areas where I think common sense might be applied immediately.

The first is putting in place legislation to allow s37 certificates to be applied retrospectively removing a headache and potential distraction at a time when schemes and their sponsors should be looking forward.

The other is to look at ways that smaller schemes, if sufficiently well-funded, might be encouraged to take some investment risk, as per the Mansion House reforms, which may need some additional incentives to make the financials stack up.  One option might be to allow the first part of any surplus to be taken with a reduced tax deduction.

Read the write up here.